Dollar borrowing costs between banks fell again on Wednesday, touching the latest in a series of all-time lows, LIBOR rates showed. Three-month interbank lending rates for dollar, euro and sterling funds fell to new lows as the euro rate hit the European Central Bank's key benchmark rate of 1.0 percent.
The US Federal Reserve, ECB and Bank of England have all been pumping cash into the banking system through various programs aimed at encouraging banks to make loans in order to boost the global economy, suffering its worst slump since World War Two.
Three-month borrowing rates for US banks firmed to 0.6044 percent on July 8, according to ICAP's New York Funding Rate from the previous session's 0.5600 percent. As usual, that was higher than the three-month dollar-denominated London interbank offered rate, last fixed at 0.5250 percent.
ICAP's one-month NYFR rose to 0.3261 percent from the previous session's 0.3155 percent. That compared with a one-month dollar-denominated Libor rate last fixed at 0.3000 percent. In the eurozone, the market is awash in liquidity after the ECB injected a whopping 442 billion euros of one-year funds late last month, and is likely to remain so even as banks roll over smaller amounts of shorter-dated funds as they mature.
This week's ECB refinancing operations saw an overall drain of about 27 billion euros as banks demanded less one-month and 91-day funds compared with maturing amounts. "The market is already in excess of liquidity so there is no reason for banks to demand more," said Patrick Jacq, strategist at BNP Paribas in Paris, citing particularly low demand for three-month funds due to the prospect of another one-year tender in September.
More than 800 billion euros in overall liquidity more than offsets the liquidity needs of less than 600 billion euros, he said. Overnight deposits at the ECB are expected to bounce back as the central bank returns funds to banks after having drained a record 276 billion euros on Tuesday at its usual fine-tuning operation held at the end of the monthly maintenance period.
Deposits had dropped to around 71 billion euros on July 7 from roughly 278 billion euros on July 6 and was well off the record 316 billion euros parked on July 5.
The three-month TED spread, a measure of credit risk, has fallen to 34 basis points - a level last seen in July 2007 - while the spread of three-month dollar London interbank offered rate (Libor) over anticipated central bank rate, or Overnight Index Swap (OIS), has tightened to 33 basis points - the narrowest since January 2008.
The market also waited to see the result of the ECB's program of buying euro-denominated covered bonds launched this week. Any purchases will show up in regular liquidity supply updates when settled, which could take up to 3 days.