Dollar lending rates in Asia extended their decline to their lowest in more than 4-1/2 years on Monday while still trading at a wide enough margin over official rates to suggest cash was not circulating as freely as in normal times.
Dollar swap spreads tightened further, to their narrowest since mid-2007, but that was driven more by Friday's grim jobs data showing US joblessness at a nearly 16-year high and therefore expectations the Federal Reserve will keep rates near zero for a long time.
While interbank US dollar rates in Singapore hit their lowest since April 2004, 3-month SIBOR was still about 108 basis points higher than the effective overnight fed funds rate. "Conditions are normalising somewhat though LIBOR is still at a hefty premium to the fed funds rate," said Amy Auster, head of international economics research at ANZ.
The situation may not return to normal until the end of the year, Auster said, adding narrow and broad money indicators still pointed to cash being hoarded by banks rather than circulating in the economy. Rates on three-month dollar funds in Singapore dropped to 1.195 percent from 1.29714 percent on Friday, hitting their lowest levels since April 2004.
Other dollar swap spreads tightened, with the two-year dollar swap spread at 54.75 basis points, its tightest since August 2007 when the effects of the subprime mortgage collapse had barely begun to be felt. That spread is more than 100 basis points off its widest in October 2008.
The three-month LIBOR was traded at a spread of 1.08 percentage points over the overnight-indexed swap, which is also a gauge of expectations of LIBOR. Australia's central bank received no bids in a $10 billion repurchase tender on Monday, also suggesting demand for US dollar liquidity had ebbed from last year's intense levels.
Katie Dean a strategist at ANZ said banks may not have been interested in borrowing the 28-day dollars from the Reserve Bank of Australia at 0.65 percent, when interbank rates were much lower. One-month LIBOR was quoted around 0.3 percent on Friday.
"Because LIBOR rates have come in quite a bit, it now means it effectively is cheaper for banks to access the money market than to access the RBA. There is clearly better functioning of US dollars through the markets," Dean said.
As LIBOR fell, investors were betting on an even steeper fall in interbank rates even though some worry that the optimism hinges on a new US Congress announcing fresh stimulus measures soon after President-elect Barack Obama's inauguration this month. The March eurodollar contract was quoted at 99.155, up 4 points since Friday and pricing in 3-month LIBOR at about 0.85 percent.