Dollar interbank lending rates hit a new record low on Friday as an abundance of liquidity and dovish central banker comments squashed short-term market rates. US short-dated rates fell further as the market took the view that policy rates will stay low for a long time, despite policy makers beginning to talk about exit strategies from extraordinary measures put in place during the financial crisis.
Two-year US interest rate swaps have fallen below 1 percent for the first time to as low 0.9690 percent. The rate reflects the fixed-rate interest stream a bank or broker will pay against a floating rate of interest. Three-month T-bill rates and two-year cash yields held close to their lowest since December, which in turn represent the lowest levels on record.
"Flow information suggests central banks buying T-bills and short-term Treasury cash even at very low yield as cash is abundant," said BNP Paribas rate strategist Alessandro Tentori. Calyon rate strategist David Keeble said year-end factors were also at play as banks tidied up balance sheets to present the best possible view of their business at the end of the year.
"It's a little bit of window dressing, to do with needing liquidity on the balance sheet. You liquidate some securities and buy something low-risk like Treasuries so you get a bit of a squeeze," he said. Three-month dollar Libor rates fell to 0.26219 percent.
Eurodollar interest rate futures - a measure of interest rate expectations - have been climbing steadily since late October, reaching contract highs and implying lower rates, on the back of dovish central bank comments. European Central Bank officials have also stressed that while they are heading for the exit, the withdrawal of special measures to provide liquidity to the banking sector and in turn boost the economy, will be gradual.
Banks currently have 595 billion euros of longer-term ECB money, over 85 percent of which is in 12-month funds, and there is around 60 billion euros of excess cash in the system, most of which is being parked back at the central bank overnight. Three-month Euribor rates edged down to 0.67313 percent.