Investors rushed to secure near-term dollars via FX swaps while short-term money market rates in Singapore and Switzerland traded in negative territory as broader market volatility and plunging prices of European bank shares prompted investors to seek safe-havens.

Despite a spike in three-month Libor which rose to its highest level in 4-1/2 months at 0.29778 percent on Thursday, traders said it masked the true cost that some banks are having to pay in the interbank unsecured markets, suggesting that stresses in the money markets are growing worse.

To protect themselves, some of these European banks have turned to the foreign exchange market, particularly in forwards and swaps and have so far found funds relatively easier to obtain, though the duration of these loans have gotten progressively shorter in recent weeks, they said.

As the need to secure funding and protect portfolios have grown in what has been a choppy year for markets this year, it has only exacerbated some of the outsized market moves seen in recent days, said the head of rates trading at a brokerage.

"In these markets, trading activity has gone down substantially and whatever little money some of our clients have made this year, they are happy to stay away and ride out this volatility rather than participate," he said.

Last week's wild moves were only the third time such volatility had rocked markets since the Great Depression in the 1930s, according to research from BofA-Merrill Lynch.

Yen-dollar cross-currency basis -- which reflects the premium for swapping yen LIBOR into dollar LIBOR and an indicator of the struggle faced by European lenders in securing dollar funding -- widened after narrowing this week.

The one-year rate rose to 44 bps on Friday after tightening to 36 bps on Monday and well in sight of a peak of 56 bps hit last week, its highest since November 2008.

The widening move was all the more stark given that some dollar-rich banks had taken to swapping their dollars into yen and buying short-dated bills to juice up their cash returns.

Front September euro-dollar futures were relatively quiet in Asian time though still implying a dollar LIBOR fix of 0.39 percent in about a month -- indicating that the upward streak in outright rates may have some more room to run.

Demand for funds has been largely concentrated outside Asia even as signs emerged of rising stress in Europe, with the Swiss National Bank tapping the Federal Reserve for dollars combined with an unidentified lender's decision to tap the European Central Bank for $500 million of liquidity.

Swirling market chatter that some players have been looking to secure funds in markets like Singapore where forwards have recently swung to a discount or banks limiting their exposure to European names to very short periods have also kept players wary.

"There is not a lot of dollar cash trading and that has been the case for nearly weeks now and all the action has been concentrated in the forwards space," said a head of rates trading at a European Bank in Singapore.

In Singapore, an influx of funds seeking safety and expectations for ongoing Singapore dollar appreciation have pushed swap offer rates -- a local benchmark for loans and mortgages which are partly based on FX forwards -- into negative territory.

Some of last week's plunge in Singapore SOR rates reversed at Friday's fixing, with the six-month SOR being set at -0.21998 percent, up about 0.80 bps from last week's lows.

Three-month dollars in Singapore were fixed higher at 0.30217 percent on Friday, pointing to a higher LIBOR fix later in the session.

Copyright Reuters, 2011