Dollar interbank lending rates pushed higher on Friday, reflecting intensifying strains in money markets as fears of credit losses at top US banks mounted, causing other lending spreads to widen as well. While central banks may have helped banks tide over liquidity problems last year, that relief has given way to concerns about earnings, growth and financial sector stability as economies head deeper into recession.
While London interbank offered rates (Libor) for euro funds fell across maturities on Thursday after the European Central Bank cut rates by 50 basis points to 2.0 percent, dollar rates rose for the second consecutive day.
The two-year dollar swap spread, the mark-up of swaps over comparable Treasury yields, hovered near 63.75 basis points, its widest in a week. That level was hit in early Thursday trade as fears intensified about the break-up of Citigroup and government aid for Bank of America Corp.
US officials said on Friday Bank of America will receive $20 billion in fresh government cash and a federal backstop against $118 billion of potentially bad assets to help the bank absorb Merrill Lynch & Co. Equity markets in Europe and Asia rallied after the news but some interest rate strategists said Bank of America's report of a fourth quarter loss and Citigroup's announcement of its fifth straight quarterly loss as it unveiled a broad restructuring plan still triggered concerns about the banking sector.
Although commercial banks' overnight deposits at the European Central Bank fell below 300 billion euros for the first time in five days, they are still well above levels when interbank lending markets are functioning properly. Banks deposited 280.2 billion euros at the ECB as of January 15, down from the previous day's 304.7 billion.
Overnight loans currently charge an interest rate of 3.0 percent and deposits pay 2.0 percent, compared with the ECB's main interest rate which is still 2.5 percent - an ECB cut to 2 percent, announced on Thursday, will take effect on January 21.
The bank has also said it will make borrowing and depositing cash overnight less attractive in another attempt to kick-start the bank-to-bank lending market. The spread of three-month dollar Libor over anticipated central bank rates, or Overnight Index Swaps (OIS), snapped its recent narrowing trend, widening five basis points to 97 basis points.
The spread is seen as a gauge of banks' willingness to lend to each other - a wider spread can indicate decreased inclination to lend. Meanwhile, the Bank of Japan offered to supply a total of 5 trillion yen to the money market via JGB repos on Friday for the third straight day. The central bank has increased the amount of its JGB repo operations from 3 trillion yen last Friday.
The rate on its one-day spot/next JGB repo operation dipped to 0.150 percent, down from 0.230 percent at a similar operation on Thursday. In New Zealand, the swap and futures markets showed markets were getting more certain of the official cash rate being cut by a further 200 basis points this year.
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