The bank-to-bank cost of borrowing dollars fell on Friday on renewed confidence measures taken by the worlds major central banks would help ease funding conditions but progress could stall as quarter end looms.
Interbank costs have been tracking lower this week, with the sharpest moves seen in dollar interest rates after the US Federal Reserve became the latest major central bank to step up efforts to tackle credit crisis by buying Treasuries and vastly expanding its balance sheet beyond the current $2 trillion.
Some market participants said interbank funding rates were likely to move sideways as the end of the first quarter looms and banks hoard cash to spruce up their books. The benchmark three-month dollar London interbank offered rate, or Libor - fell to 1.22281 percent, its lowest in 5-1/2 weeks - from 1.22688 percent on Thursday. "Weve seen quite good declines this week across most currencies. We are seeing some stabilisation in the rates," said Kenneth Broux, financial markets economist at Lloyds TSB in London.
The premium that three-month dollar Libor trades over the Overnight Index Swap rate tightened by five basis points to 101 basis points and Broux said he expected it to narrow further to around 95 basis points in April. A narrower spread suggests less credit stress and greater willingness among banks to lend to each other. That spread traded consistently at just below 10 basis points before the credit crisis erupted in late 2007.
Market participants are hoping the US governments Term Asset-Backed Securities Loan Facility, or TALF, which kicked off on Thursday, will channel cheap loans to cash-strapped consumers and small businesses. The Fed said on Thursday it will expand the types of TALF collateral to include mortgage servicing advances and loans to car dealers to finance their inventories in April as it pursues an aggressive quantitative easing policy.
The interbank rate for borrowing euros over three months hit a euro lifetime low at 1.56625 percent as three-month Euribor lending rates for the currency sank to a fresh record low on low official interest rates and generous money supplies from the European Central Bank.
In a sign banks could be starting to hoard cash again ahead of the end of the quarter, commercial banks overnight deposits at the ECB rebounded from a five-month low to rise back above 50 billion euros. Elsewhere, interest swaps in Asia added to Thursdays falls after the Fed said it would buy large quantities of government debt.
Korean won 5-year IRS fell 4 basis points (bps) to 3.44 percent and the Singapore one-year contract dropped to 1.64 percent from 1.70 percent. In Hong Kong, where the currency is pegged to the US dollar, IRS rates also fell but the drop was marginal. The one year IRS eased to 1.04 percent from the previous close of 1.05 percent.