Stress levels in dollar money markets reached their highest levels since August 2009 on Tuesday as investors fretted that the European sovereign debt crisis needed more action to calm markets. Markets' biggest concern is whether governments can tackle long-term debt risk and yet leave room to boost economic growth and encourage banks to lend to non-financial sectors.
ECB sterilises 16.5bn euros of bond buying Euro fund stress levels were steady at 22 basis points, albeit still elevated, while three-month Libor edged lower. The three-month dollar London Interbank Offered Rate was fixed at 0.46469 percent by the British Bankers' Association, up from 0.46 percent on Monday, while the spread of dollar Libor over so-called "risk-free" Overnight Index Swap rates blew out to 23 basis points from 19 bps.
The dollar Libor-OIS spread was the widest since August 2009 and wider than in the month before the global credit crisis began in August 2007 when it was in its teens. The European Central Bank, as part of efforts to sterilise 16.5 billion euros of peripheral eurozone debt buying by eurozone central banks, conducted a one-week fine-tuning operation to re-absorb the liquidity injected into financial markets and met with 162 billion euros-worth of bids.
The ECB operation was part of a trio, along with a three-month dollar tender after the US Federal Reserve last week reopened currency swap lines and a weekly refinancing tender. However, some stress indicators ebbed from Monday's peaks. One-year forward euro/dollar cross currency swap rates were quoted on Tuesday by ICAP at 45.4 basis points, down from around 50 bps on Monday but still up from about 37 bps just over a week ago. The drop reflected weakening dollar demand. The three-month FRA/OIS spread starting in September was at 40.4 bps, up from 20 bps in mid-April but off 42 bps on Monday.