Bank-to-bank dollar funding costs rose on Tuesday, again reaching the highest in over six months as investors prepped for the Federal Reserve to eventually move to tighten monetary policy. The move higher came in contrast to that of euro funding costs, where the three-month euro rate carved out a record low a day ahead of a fresh liquidity injection by the European Central Bank.
-- Euro Libor hits record low
The benchmark dollar London interbank offered rate rose to a six-month peak of 0.29088 percent as the market braced for the Fed to start withdrawing some of the massive liquidity it has injected into the US economy. "People are wondering how long (the Federal Reserve) are going to be keeping accommodation at zero," said William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Massachusetts.
While few analysts expect the Fed to raise interest rates from current levels near zero any time soon, the US central bank is widely believed to be preparing to lay the groundwork for the eventual removal of liquidity. The Fed has already wound down some of its emergency lending programs and some cash has been removed from the system via special sales of bills from the Treasury Department's Supplementary Financing Program and as Fannie Mae and Freddie Mac have bought bad mortgages.
The three-month euro Libor fell to 0.58 percent from 0.58063 percent, marking an all-time low. Money market traders expect banks to take up 70 billion euros of six-month loans at the ECB's longer-term refinancing operation (LTRO) on Wednesday. The bank will also offer three-month funds.
"Whatever the demand at the six-month tender, excess liquidity will increase and so the Eonia (overnight rate) will remain at the lows," said Patrick Jacq, strategist at BNP Paribas in Paris. Excess liquidity will persist until the middle of the year when banks return nearly half a trillion euros of one-year funds to the ECB, more than half the current outstanding liquidity. This should then cause the Eonia overnight rate to rise towards the ECB's benchmark 1 percent rate from around 0.3 percent currently.