A crucial sterling interest rate spread tightened to its narrowest level in two years on Monday, suggesting a marked recovery in confidence since the Lehmans crisis a year ago shattered financial markets. Stronger market conditions were also reflected in the latest daily fixing from the British Bankers' Association, showing record lows in the interbank cost of borrowing dollar, euro and sterling funds for three months.
Earlier Euribor three-month euro lending rates hit a fresh record low and one-week rates rose for a fifth successive trading session. But a bigger focus was the spread of three-month sterling Libor rates over OIS rates, seen as a crucial gauge of banks' willingness to lend to each other. That gap narrowed by two basis points to 27 bps, its narrowest level since at least the third quarter of 2007 when the global credit crisis began, according to Reuters charts.
The equivalent OIS spread for dollars held steady, reflecting the large amount of liquidity still in the banking system. The OIS spread for euro funds tightened slightly to 34 bps. The spread expresses the three-month premium paid over anticipated central bank rates, or Overnight Index Swap rates. A wider spread is seen as an indication of decreased inclination to lend.
"It is timely that as we see the first anniversary of the collapse of Lehman Brothers which widened the OIS spreads we also have the sterling OIS spread tightening," said Christoph Rieger, interest rate strategist at Commerzbank in Frankfurt. "But it does not mean we are out of the crisis. The market is not functioning normally as the European Central Bank has provided so much liquidity the market is distorted." The euro OIS spread also felt downward pressure. "I see no reason why Euro Libor-OIS spreads cannot continue to tighten," said Peter Chatwell, a market analyst at Calyon in London. ECB rates are anchored at 1.0 percent and not expected to rise until at least late in 2010.