The interbank cost of borrowing three-month euro funds slid to a fresh euro lifetime low on Tuesday, the British Bankers Association's latest daily fixing showed. However, the spread of three-month London interbank offered rates over OIS rates for euros and sterling widened by three and five basis points respectively.
The spread expresses the three-month premium paid over anticipated central bank rates, or Overnight Index Swap rates. It also followed the downward spiral in Euribor bank-to-bank euro lending rates on Tuesday, as banks factored in assumptions that the European Central Bank will cut interest rates in the next few months.
"Money is getting a little tight again. Bank stocks are weak and fear is back. This is putting a little upward pressure on OIS-Libors," said David Keeble, head of fixed income strategy at Calyon in London. Sterling-OIS spread was becoming particularly tight. "The clearing banks used to be the big liquidity providers but the chaos in the UK banking system and the fact that the Bank of England's QE (Quantitative Easing) ideas haven't kicked off yet means spreads remain elevated," he said.
The BoE and ECB are both scheduled to decided on interest rates next on March 5. ECB Governing Council member George Provopoulos said the central bank was unlikely to cut interest rates by more than 50 basis points to 1.5 percent in March and zero rates are "unimaginable".
In money market operations, the ECB allotted 237.8 billion euros in seven-day funds and called for bids in a 91-day tender. Dollar funding rates remained unchanged in Asia on Tuesday, but the dollar Libor fixing in London perked slightly higher, and trading was within the ranges it has been in all this month.
US rates continued to be shackled by worries over the US administration's new plans to stress test and infuse capital into banks. "The situation is rather stable and likely to remain so unless there is some major event in the US this week," said a trader in London.