The rates banks charge one another for borrowing three-month dollars edged higher on Friday from the previous day's record low fixing, but the rise was far less than some market participants feared after news of planned changes to the setting of Libor rates.
Libor is the benchmark for more than $350 trillion of financial products and the world's most widely monitored interest rate. The equivalent sterling and euro rates clocked fresh all-time lows, according to the latest daily fixings from the British Bankers' Association (BBA).
The three-month euro rate hit 1.22563 percent, declining below the previous nadir struck on May 19, while the cost of borrowing three-month sterling funds was fixed at 1.23938 percent. The fixings attracted investor interest in the wake of the BBA's announcement of reforms to the London interbank offered rates system (Libor).
The BBA said it had no target number for additional banks to join the panels that participate in the fixings, but said it planned changes in the definition of its Libor rates to allow a greater number of firms to take part in the process.
"The increased universe of rate providers will make the Libor fixings more stable and robust and a better indicator of system-wide borrowing costs," said T.J. Marta, chief market strategist at Marta on the Markets, in a research note.
The one-month New York Funding Rate (NYFR) was fixed at 0.33 percent Friday, up from 0.32 percent Thursday, while the three-month NYFR was fixed at 0.6178 percent Friday, down from 0.6306 percent Thursday. Libor rates represent the average cost at which a panel of banks believes funds can be borrowed for a given period of time in a given currency.
"The fear of higher Libor rates that was being spoken of yesterday evening - and was priced into the Eurodollar strip - turned out to be a storm in a teacup," said Peter Chatwell, a market analyst at Calyon in London. The planned change to the BBA rate survey had spurred concern in financial markets that smaller, less credit-worthy banks would enter the Libor rate-setting process, raising the cost of borrowing money, particularly in dollars, for all banks that use Libor.
Those concerns contributed to a 7-basis-point widening in two-year US interest rate swap spreads Thursday and a rise in the dollar against the euro. By 9:15 am EDT (1315 GMT), the two-year US swap spread was at 49 basis points, versus around 52 basis points at the intraday peak in New York Thursday.
Chatwell described the worries as overdone, especially in the euro dollar market. Futures had priced in a large jump upward in the Libor rate to as high as 0.88 percent for three-month dollar funds in September, he said. Market watchers were also soothed by what happened to sterling rates, in particular.
"The drop in three-month sterling is particularly interesting, as it looks like a good attempt to break the 1.25 percent resistance point," said one trader in London. Calyon's Chatwell added: "The sterling fixing is the best example of how unlikely it is that Libors will be pushed higher if the panel is enlarged. And it is reassuring to see that some of the banks which are setting higher rates have also reduced their rates."
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