US and European banks struggled for cash on wholesale lending markets on Friday as they closed books on the final day of a tumultuous third quarter amid signs credit was still tight.
A continued lack of liquidity on interbank markets on both sides of the Atlantic and ongoing difficulties for some smaller banks trying to raise short-term funds offset optimism earlier in the week about an opening up of international bond markets for specific borrowers.
Benchmark eurozone lending rates rose to six-year highs and three-month interbank offered rates were fixed at 4.792 percent - the highest since May 2001 and almost 80 basis points above the European Central Bank's key interest rate. Federal funds, the key overnight market for borrowing between banks, traded at 5.25 percent early on Friday in New York, a full 50 basis points above the fed funds target rate the US central bank sets.
Normally, fed funds would not trade more than a handful of basis points on either side of the target rate, which is now at 4.75 percent after the Fed cut it for the first time in four years on September 18. Climbing fed funds rates pointed to a double whammy of quarter-end supply pressures and fear about lending conditions in money markets, analysts said.
"You do have some quarter-end pressures in effect that provide some of the reasoning for the upward pressure on both fed funds and Libor," said Kenneth Kim, economist with Stone & McCarthy Research Associates in Princeton, New Jersey. Libor or the London Interbank Offered Rate is widely used to benchmark global short-term lending costs.
"The other explanation is there are concerns in the market that the liquidity crisis has not dissipated," Kim added. "We have pressure returning (to short-term lending markets) and I would say there is cause for concern," he said.
Although the European Central Bank said the amount of cash eurozone banks sought to borrow from it at penalty rates slowed to a trickle on Thursday, from three-year highs of almost 4 billion euros the previous day, jitters persisted about a repeat of the problems faced by stricken British lender Northern Rock.
Analysis of Bank of England data showed Northern Rock may have borrowed a further 5 billion pounds ($10.1 billion) from the central bank in the past week - taking borrowing from the emergency facility to almost 8 billion pounds in two weeks. Northern Rock shares were down almost 6 percent on Friday and European and bank and financial stocks gave up some of the gains made on Thursday on fresh take-over talk.
"In short-term money markets, there certainly does appear to be an issue...there is a lot of jitteriness and fear going into not just month end but also quarter end," said T.J. Marta, fixed income strategist with Royal Bank of Canada Capital Markets in New York.
"There is a fair amount of trepidation that we have not found the skeletons yet," showing the full extent of banks exposures to riskier assets across the world, Marta added.
Credit spreads, measuring the elevated premia being demanded by lenders, also rose. The widely watched iTraxx Crossover index widened some 6 basis points to 318 basis points. Global central banks continued to add liquidity to their domestic banking systems with mixed results.
The Federal Reserve added $4.75 billion of temporary reserves to the banking system via a 3-day repurchase agreement on Friday, following its big injection totalling $38 billion via four separate operations on Thursday.
That was the Fed's biggest daily addition since a matching amount on August 10, which is loosely seen as the beginning of a crunch in credit markets, when companies began to have difficulty obtaining credit due to problems that originated in the US subprime mortgage market.
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