Dollar three-month funding rates hit another record low

Short-term dollar rates dipped to a fresh record low in Asia on Wednesday whilst the wide spread between those and longer term rates showed credit markets still do not share the optimism behind the rally in risky assets over the past few months.
Three-month dollar funding rates in Singapore dropped to a record low of 0.73722 percent, extending a steady downtrend that has halved the cost of funds since the end of March. Spurred by a surge in equity markets and a rally in risky assets and commodities, that decline in short-term LIBOR has also depressed money market rates in Asia's most open markets such as Singapore and Hong Kong.
Some short-term dollar funding and swap spreads are at their lowest in years or at least levels seen before Lehman Brothers collapsed in September last year, as lenders relented under the flood of money the Federal Reserve and US Treasury have pumped into markets.
Still, the spread between one-year and 3-month LIBOR is 83 basis points, just slightly lower than levels seen in November, which were the widest spreads in at least 7 years. "We have had a nice correction in LIBOR that is coming to an end. We don't have that much room to fall," said Jens Lauschke, a strategist with DBS Bank in Singapore.
"But we still have a massive credit risk premium in longer-term LIBORs and the curve hasn't actually flattened." With the one-year dollar interest rate swap trading at 0.8 percent, which is close to 3-month LIBOR, it did seem like longer-term LIBORs had a credit risk premium built in, rather than any expectations of interest rate rises. The spread between two-year dollar swaps and corresponding Treasury yields was narrower at 34.75 bps, just off a 2-year low on Tuesday.
Another gauge of risk in money markets, the spread between dollar LIBOR and 3-month overnight indexed swaps, the latter a measure of market expectation of policy rates, was below 60 bps, its tightest since early 2008. In Singapore, interbank rates extended their slow and steady grind lower. Interbank 3-month rates have dropped 6 bps to 0.5 percent in the past two weeks.
Three-month rates in Hong Kong dollars dropped 9 bps from Tuesday to 0.404 percent. In Thailand too, where the interbank rates are a function of dollar LIBOR and the baht forwards, 3-month rates have fallen 20 bps in the past week to 1.36 percent.