Tensions in money markets eased slightly on Monday after US lawmakers reached a tentative debt deal to avert a default but dollar funding costs are still seen rising as the United States faces the risk of a ratings downgrade. President Barack Obama announced a last-minute deal to raise the US borrowing limit and avoid a default, sparking a relief rally in financial markets, though the deal was seen not going far enough to avoid a costly credit rating cut.
The rate on the T-bill issue, which the government might skip repaying if its statutory $14.3 trillion borrowing limit is not raised by Tuesday, was last quoted at 19 basis points, down 6 basis points from late Friday, according to Tradeweb. Conditions for European banks in US dollar markets, which deteriorated over the past week as the angst-ridden US deficit talks compounded concerns about an intractable eurozone sovereign debt crisis, improved slightly.
Three-month euro/dollar cross-currency basis swaps - which show the rate charged when swapping euro interest payments on an underlying asset into dollars - were quoted at -40 bps from -46.5 bps on Friday, which was the most in six months. One-year basis swaps were at 32.5 bps from 36 bps.
"We've seen a little bit of improvement across markets ... but there's still the vote to go through ... There's a touch of relief rather than strong shift in positions," said Chris Clark, an analyst at ICAP in London. Both houses of the US Congress are set to vote on the White House-backed deal, which would trim about $2.4 trillion from the deficit over the next decade, later on Monday. London interbank offered rates for three-month dollars rose to 0.25722 percent from 0.25550 percent, extending a rise that began two weeks ago as cash left prime money market funds in favour of insured bank deposits, for example.