The rate banks charge each other for lending dollars rose on Thursday, most notably for one-month money, as worries about year-end funding eclipsed optimism over Federal Reserve programs to get credit flowing again.
The rise in one-month dollar London interbank offered rates was the biggest since late 1999 when banks scrambled for cash to cover that year-end period when "Millennium Bug" fears were rife. Interbank liquidity and activity was even thinner than usual because US financial markets were closed for the Thanksgiving holiday.
Three-month euro and sterling Libor eased and the cost of borrowing three-month dollars, euros and sterling relative to expected central bank rates across all three currencies fell. "With all the (central bank-aided) funding, you're avoiding banks heading into insolvency ... but you're still not getting to a situation where banks are going to lend aggressively," said Francis Yared, rates strategist at Deutsche Bank in London.
Major UK and US banks have issued government-backed debt in recent sessions. J.P. Morgan Chase recently sold $6 billion of FDIC-backed bonds, Morgan Stanley sold $5.25 billion and Goldman Sachs sold an inaugural $5 billion. But as banks prepare to dress up their balance sheets for year-end accounting purposes they're keeping as much of that funding as possible on their own books.
One measure of that is the latest European Central Bank data showing euro zone financial institutions parked 216.9 billion euros in overnight deposits at the ECB as of November 26. That was slightly down from 218.9 billion euros the day before but still highlights banks' preference to keep large amounts of cash in the central bank vaults rather than lend out.
Money markets are even more frozen now than they were 12 months ago, despite myriad actions to get them functioning again from central banks around the world. "In terms of liquidity and activity it's a lot quieter now than it was the same time last year," Yared at Deutsche said. One-month dollar Libor jumped almost 47 basis points on Thursday to 1.90000 percent, and three-month dollar Libor had its biggest rise in almost two months to 2.20250 percent.
One-month euro Libor rose more than 20 basis points to 3.58000 percent, its biggest rise since a 64 basis point jump on November 29 last year. The premium for three-month Libor borrowing over market-based expectations of official policy rates across all three currencies as measured by Overnight Index Swaps eased on Friday, particularly for sterling.
Highlighting the persistent aversion to risk, the three-month T-bill yield is still just 0.116 percent after having fallen as low as 0.005 percent this week. The yield on 10-year Treasury bonds fell on Wednesday to a 50-year low of 2.9731 percent and the cost of insuring against the United States defaulting on its Treasury debt hit a record high.