The rates banks charge one another for loans fell on Tuesday, with the three-month rate marking a record low as credit conditions improved on cautious optimism the worst of the global financial crisis may be over. Traders cited indications funding needs at the end of the first half of the year would be filled in an orderly manner.
At mid-June, Libor/OIS spreads, or the three-month premiums paid over anticipated central bank rates, remained near their recent lows after gradually tightening throughout this year. Before quarter-end and the key IMM derivatives settlement date later this week "the relatively mild re-widening of spreads in recent weeks may be seen as an encouraging sign that the liquidity squeeze is over and that the substantial central bank actions to shore up the very short end have been a success," said Nomura rate strategist Sean Maloney.
The lower rates on interbank loans generally signal that despite expected future write-downs, banks see less counter-party risk and are willing to lend to each other at much lower rates than at the time of the mid-September collapse of Brothers, the height of the financial crisis.
"Confidence is the key thing the Treasury's stress tests produced," BNP Paribas managing director of economic research Brian Fabbri told the Reuters Investment Summit in New York.
The three-month dollar London interbank offered rate (Libor) was fixed at 0.61313 percent - a new low and down from 0.61438 percent on Monday. The three-month Libor/OIS spread was steady at 41 basis points. Equivalent euro rates fixed half a basis point lower at 1.24750 percent and the three-month spread was steady at 50 basis points.
The rates are indicative levels of what price banks believe they can secure funds at. Traded deposit rates for three-month dollars and sterling have however shown signs of turning higher in recent weeks, in line with upward moves in other rates markets.
In a sign that the situation is still far from normal, the European Central Bank warned on Monday that eurozone banks will probably need to write down another $283 billion on bad loans and securities over the next 18 months. The ECB allotted 309.6 billion euros in its latest seven-day financing operation, against a benchmark requirement of 293.5 billion euros and a maturing amount of 302 billion euros.
Elsewhere, Australian interest rate swaps slipped on Tuesday as the central bank's minutes hinted it was ready to ease monetary policy again if needed, while a Bank of Japan policy review suggested it was in no hurry to end extraordinary policy measures. The Bank of Japan kept interest rates on hold at 0.1 percent at the end of a two-day policy review on Tuesday and held off on any new initiatives, as widely expected.