The bank-to-bank lending rates for dollar, euro and sterling funds mostly drifted lower on Wednesday as some central banks added liquidity into the system but signs of funding strains as the year-end looms were visible.
The premium paid for London interbank offered rates (Libor) over anticipated central bank policy rates or Overnight Index Swaps (OIS) stayed stubbornly wide for dollar and sterling.
On the whole, the improvement seen in the interbank money market following a slew of measures by major central banks and governments aimed at lubricating the banking system has stalled in recent weeks. Earlier, the European Central Bank added a total of $85.395 billion in US dollar liquidity and also lent banks 42.185 billion euros in 91-day funds. The Bank of England and Swiss National Bank also lent US dollars to banks.
The three-month dollar Libor rate slipped to 2.18 percent from around 2.20 percent on Tuesday while three-month euro and sterling Libor rates also eased. But the spread of three-month Libor over OIS rates for dollars widened to 179 basis points from 172 basis points. The sterling spread also widened but the euro spread narrowed a touch.
These spreads are seen as a gauge of banks' willingness to lend to each other - a wider spread suggests less inclination to lend. Overnight deposits at the ECB remained at elevated levels as banks continued to prefer holding cash rather than lend it on in interbank markets.
This week, the Federal Reserve started lending to money market funds via its new cash facility, the Money Market Funding Facility (MMIFF), while top US banks have begun to tap the government-backed Temporary Liquidity Guarantee Program (TLGP), under which the Federal Deposit Insurance Corp will guarantee debt issued by financial institutions.
Goldman Sachs was first to use the TLGP programme with a $5 billion bond sale. Citigroup, J.P. Morgan, Morgan Stanley and Bank of America are reported to be preparing sales in what is expected to become a flood of new issuance. The five-year Credit Default Swap (CDS) of banks participating in the BBA's Libor fixing is currently at around 135 basis points, well above the 50 basis points seen a year ago.
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