Dollar funding costs remained elevated in Asia on Friday as uncertainty about the shape of a US stimulus package and what it would do to banks' balance-sheets heightened credit risks. Dollar swap spreads also showed no signs of narrowing as interbank players waited for the US Senate vote on a stimulus rescue package that looked set to be approved by Monday.
But possibly total less than the $937 billion originally proposed. Most concerns appeared to centre around the US government's plan to buy some banks' bad assets, and the danger valuations of those assets would force banks to write down billions of similar assets.
"If the US could convince the markets that it will work, and there are a lot of questions whether it will, but if it does it will be very good for the stock markets," said Joseph Kraft, head of Japan capital markets at Dresdner Kleinwort.
"It's a double-edged sword and it is going to depend on what comes out on Monday." US dollar funding markets in Singapore were quoting 3-month dollars at 1.23938 percent, a shade lower than 1.24667 percent on Thursday, but much higher than levels of 1.09 percent in mid-January. Eurodollar futures meanwhile rose, pricing in 3-month LIBOR at 1.2 percent by March.
The 3-month OIS spread, the spread between interbank rates and overnight-indexed swaps, has also stayed wide between 98 and 99 basis points (bps) this week, indicating expectations of widening spreads between interbank and policy rates. Meanwhile, concerns over a rise in government bond issuance to fund the stimulus plans have caused yield curves to steepen in most markets. The spread between 10- and 2-year yields in US Treasuries has widened to 193 bps from 123 at the end of December.
"I don't hear anything that could turn the market massively bullish right now in the package," Kraft said. "So there's probably a little bit more downside risk than upside risk." Meanwhile in Australia, worries about the government's increased debt raising and hopes surrounding the two tranches of stimulus spending led to markets paring expectations of future rate cuts, even after the central bank turned more pessimistic on the economy.
The Australian government said on Wednesday it plans to issue between A$22 billion and A$24 billion in debt between now and the end of June, which is much higher than the A$15 billion it had planned to rg some positive effect on the economy and that rates are at historical lows, we believe the debate should be about whether the RBA should be easing in moves of 25bp or 50bp.