The cost of borrowing dollars between banks plumbed lifetime lows on Tuesday and a key credit spread compressed to its tightest in over a year, reflecting returning confidence in money markets nursed by central banks.
DOLLAR, EURO, STERLING THREE-MONTH RATES PLUMB FRESH LOWS The record low Libor rates drove the two-year US swap spread to crunch into 36 basis points, its narrowest since late February 2007 and pre-dating the start of the global credit crisis, suggesting a gradual healing in credit markets.
News Britain held talks with investors to gauge their interest in buying its stakes in part-nationalised lenders was another step to bolster confidence in the financial system, market participants said. This followed a report overnight that US banks are scrambling to repay money from the government's Troubled Asset Relief Programme in an effort to signal their strength to the market and to avoid the tighter regulation that comes with government funds, particularly limits on compensation.
Against this backdrop, London offered rates for three-month dollar funds fell three basis points lower at 0.7525 percent, its lowest ever, with equivalent euro and sterling rates also dipping to lifetime lows. The premium that three-month dollar Libor trades over anticipated central bank rates, or Overnight Index Swap rates (OIS), narrowed by almost six basis points to 56 basis points, its tightest since late February 2008, predating Lehman Brothers' implosion in mid-September.
The equivalent spread for euros compressed by as much as 10 basis points to 51 basis points, its slimmest since March 2008. "Finally we are starting to see (an improvement in the liquidity situation. It's becoming much easier to borrow cash, thanks to many programmes, quantitative easing, Fed programmes," said David Keeble, head of interest rate strategy at Calyon in London.
Traders said Libor rates have maintained their downward trend as banks find themselves better funded given the massive central bank measures to boost liquidity and get the interbank marketing going again.
In a sign that commercial banks were hoarding less cash at the European Central Bank, with latest data showing overnight deposits fell to 15.798 billion euros on May 18, down from the 21.610 billion euros reported on Monday and the lowest amount since late September. A Reuters poll showed on Monday that more than half of euro zone money market dealers think the worst of a liquidity crisis dating back to 2007 is over, although some large banks still think it has further to run.
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