Bank-to-bank dollar funding costs eased on Monday with the three-month rate reaching a fresh low as hopes the embattled financial sector may be recovering continued to help mend the interbank money market.
The three-month dollar London interbank offered rate (Libor) touched a record low of 0.92 percent, while equivalent euro and sterling rates also hit new troughs of 1.29625 percent and 1.41188 percent respectively. Extending the recent string of upbeat results, HSBC Holdings, Europe's biggest bank, said its first quarter profits were "well ahead" of last year, swelled by record results in its investment bank arm and gains on the value of its own debt.
A lack of nasty surprises in the US government's bank stress test last week as well as recent central bank actions have also been supportive for the sector.
The European Central Bank said last Thursday it would buy bonds for the first time in a fresh effort to revive the credit market, while the Bank of England raised the size of its bond buying programme, injecting more liquidity into the system.
Since the collapse of Lehman Brothers late last year, central banks have played a pivotal role in providing banks with massive short-term liquidity as the money market froze up. The premium that Libor rates trade over a risk-free benchmark, the Overnight Index Swap rate (OIS), all eased on Monday, with the three-month dollar/OIS spread tightening to 73 basis points at one stage - the narrowest since late July. Still, that spread traded consistently at around 10 basis points before the financial crisis erupted in July 2007. In Asia, three-month dollar funding rates in Singapore fell to 0.92357 percent, down from Friday's 0.95333 percent.
Risk premiums in Asian markets have been sinking as the credit markets catch up with the spectacular rally in equities that has stoked the MSCI's index of Asia-Pacific stocks outside Japan up 52 percent since the post-financial crisis low struck in early March.
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