Bank-to-bank three-month euro funding costs hit their lowest since the 1999 launch of the single currency on Friday, pressured by excess cash in money markets and the prospect of lower official interest rates. Dollar funding costs over three months however inched up, with news that the US administration was planning to help homeowners having little immediate impact on money markets.
A Reuters report on Thursday that the Obama administration was working on a programme to subsidise mortgage payments for troubled homeowners, boosting stock markets and pressuring safe-havens such as the dollar and government debt markets.
London offered rates for three-month euros fell to a record low of 1.935 percent, according to the latest fixings by the British Bankers' Association, following a similar slide to a lifetime low in the three-month Euribor lending rate.
The three-month Euribor rate is traditionally the main gauge of the interbank euro lending and a mix of interest rate expectations and banks' appetite for lending. Banks use Libor rates as reference rates to charge each other for borrowing short-term funds and they are also the basis for interest rate contracts around the world.
Libor rates for euros have been falling steadily since October when the European Central Bank (ECB) started its rate cut campaign which has so far seen it slash 2.25 percentage points from benchmark interest rates to 2 percent. The ECB also introduced changes in January which it hoped would make depositing cash at the ECB less attractive and encourage banks to start lending to each other.
"Although the amount of money that's been taken at the tenders this week fell quite a lot - the long fixed rate tenders - the amount of money being put back to the ECB at the deposit rate is falling as well," said Laurence Mutkin, interest rate strategist at Morgan Stanley in London.
Latest figures show overnight deposits by commercial banks at the ECB fell to 75 billion euros as of February 12 from around 98 billion euros reported on Thursday - less than a third of the record high of 315 billion euros set a month ago. The three-month OIS spread, the spread between interbank rates and overnight-indexed swaps held steady for euros, tightened for sterling but nudged wider for dollar.
"What we had yesterday is positive in general but it won't have an immediate impact on credit spreads in the LIBOR market," said Jens Lauschke, a strategist with DBS Bank in Singapore, referring to the US mortgage subsidy plan.
"There is a very specific kind of risk and liquidity premium here and you've really got to have confidence among the banks and towards the banks returning to see LIBOR spread narrow." The two-year US dollar interest rate swap spread over comparable Treasury yields - a closely-watched gauge of investor risk aversion - expanded by two basis points to 63 basis points from late Thursday trade, Reuters charts showed.