Record low rates and falling risk premiums on Friday reinforced the notion the US short-term credit markets are returning to conditions before the global financial crisis erupted two years ago. Credit conditions have indeed improved in the wake of the massive amounts of money that governments flooded into global money markets, according to US Federal Reserve Chairman Ben Bernanke.
While these unprecedented efforts to stem the crisis have helped to restore investor confidence and market stability, they alone cannot prevent further credit deterioration, Bernanke said in a speech on Friday. Still, key interbank rates have been falling, suggesting few hurdles if any for credit-worthy banks to obtain funds. "You are not far from normalisation," said Rudy Narvas, senior strategist with 4Cast Ltd in New York.
The rate on three-month dollars in the London interbank market fell to an all-time low of 0.39313 percent, down from 0.40688 percent on Thursday and 0.40688 percent a week ago. Three-month Libor on sterling also hit a record low at 0.72125 percent, while equivalent Libor on euros edged up from its record low of 0.82500 percent. Libor is the benchmark rate for more than $350 trillion of financial products world-wide.
The three-month premium banks pay above the anticipated central bank rates, or overnight index swap rate, narrowed to 22 basis points on Friday. This was the tightest level since August 2007, according to 4Cast's Narvas.
The three-month Libor/OIS spread is seen as a gauge of banks' willingness to lend to each other - a wider spread is seen as an indication of decreased inclination to lend. Another risk gauge, the TED spread - or the rate difference between three-month dollar Libor and the rate on three-month Treasury bills - compressed to 23 basis points, a level not seen since March 2007. Lower borrowing costs, however, have not spelled more loans to businesses and consumers, analysts said.
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