Interbank rates inch lower

Three-month interbank lending rates in sterling and euros extended a steady fall on Friday but spreads between interbank and policy rates showed persisting reluctance among banks to expose themselves to credit risks.
Three-month dollar rates inched higher with signs of distress in the global economy continuing to mount. Worries grew over the outlook for US bank Citigroup, while the future of US automakers hung in the balance.
Such worries resulted in a sizeable rally for government bonds and interest rate futures on Thursday, some of which fed through into Friday's fixing of London interbank offered rates.
Three-month euro Libor rates fell 5 basis points to 4.004 percent, the lowest since April 2007, while equivalent sterling rates fell 3 basis points to 4.038 percent. The fall in three-month dollar rates stalled again however, with rates up nearly half a basis point at 2.158 percent.
"The whole market is on tenterhooks at the moment, the risk trade has come back into fashion very rapidly and banks have been suffering on equity markets," said Calyon's Keeble. The spread between 3-month euro and sterling Libor and market expectations of official interest rates, measured by overnight index swaps, widened on Friday.
The US spread, although slightly tighter on Friday, has widened over the week to around 170 basis points after hitting a 7-week low close to 160 basis points. "What's important to note is that this time stock markets, CDS markets and credit markets are effecting sentiment on financial markets, rather than the other way round," said Morgan Stanley rate strategist Laurence Mutkin.
In Asia, the Bank of Japan held back from a rate cut on Friday and tweaked its market operations to ease funding pressures towards the end of the year. But domestic liquidity remained an issue in Asia, keeping interbank rates in countries such as South Korea, India and Indonesia far above the yields of the safer government bonds.
European banks also preferred to rely on their central banks rather than each other. Overnight deposits at the European Central Bank were still over the 200 billion euro mark, as commercial banks continued to hoard money rather than lend it on money markets.