Money market strains intensified on Thursday as a growing sense of gloom surrounding the global economy and banks pushed US interest rate swap spreads wider and ensured European banks hoarded rather then lent cash. Sources said the US government is in talks with Bank of America to provide billions of dollars of extra aid, and a media report quoted J.P. Morgan chief executive Jamie Dimon as saying the US financial and economic crisis will worsen this year.
J.P. Morgan surprised on Thursday with fourth quarter earnings that beat expectations, however, which gave financial markets some much-needed respite. There are other chinks of light, like a gradual increase in US commercial paper market activity - thanks to Federal Reserve support - and the so-called "TED" spread at its narrowest since just before the collapse of Lehman Brothers last September. But analysts said very little of that is finding itself into the wider economy. Euro zone banks deposited more than 300 billion euros overnight at the European Central Bank for the fourth consecutive day on Thursday.
And while London interbank offered rates (Libor) for euro and sterling funds fell across most maturities again, dollar rates rose. On top of the media reports on BofA and the comments from J.P. Morgan's Dimon, Citigroup shares plunged more than a fifth on Wednesday on concerns over its profitability. The bank plans to report its fourth quarter earnings on Friday.
The three-month dollar Libor was fixed at 1.08563 percent on Thursday, according to the latest fixings by the British Bankers' Association - rising slightly from Wednesday's 1.08250 percent, the lowest since June 2003. The spread of three-month dollar Libor over anticipated central bank rates, or Overnight Index Swaps (OIS), narrowed to 92 basis points from 93 basis points on Wednesday, its narrowest since mid-September just after the collapse of investment bank Lehman Brothers, Reuters data showed.
The TED spread, which measures the premium banks charge for three-month dollar Libor over comparable T-bill yields, dipped below 100 basis points for the first time since just before Lehman's demise. The two-year US swap spread widened on Thursday to 55 basis points from 52 basis points late in New York trade Wednesday. The spread had narrowed to 47 basis points on Monday - around the lowest level seen since mid-2007 before the global financial crisis blew up in August that year. Three-month euro Libor fell ahead of the ECB's rate decision later on Thursday but the Libor/OIS spread widened marginally.