Money Market Indicators Signals Banking Sector Stress Stable

Money-market indicators signaled little change in the ability of banks to borrow and lend short term funds with the gap between the London interbank offered rate and the Federal funds rate steady.

Three-month London interbank offered rate, or Libor, which represents the rate at which banks say it would cost to borrow from another, was 0.4659 percent, compared with 0.4657 percent yesterday, according to the British Bankers’ Association.

The Libor-OIS spread, a gauge of banks reluctance to lend, was little changed at 32.3 basis points. The gap was as high as 51 basis points this year on Jan. 6. Overnight index swaps, or OIS, give traders predictions on where the Fed’s effective funds rate will average for the term of the swap. The central bank’s target rate is set in a range of zero to 0.25 percent.

Predictions in the forward market for Libor-OIS, known as the FRA/OIS spread, was 33.6 basis points for June, compared to 34.75 basis points yesterday, according to UBS AG data. The spread is up from 30 basis points on March 1.

The cost for European banks to convert euro-denominated payment streams into dollars-based funding via the cross currency swaps market fell. The three-month cross-currency basis swap was 45.9 basis points below Euribor, compared to 47.5 basis points yesterday. The basis swap rate was minus 162.5 basis points on Nov. 30.

The difference between the two-year swap rate and the comparable-maturity Treasury note yield, known as the swap spread, narrowed to 30.69 basis points from 31.17 basis points. The gap is a gauge of investors’ perceptions of U.S. banking sector credit risk as swap rates are derived from expectations for dollar Libor. Swap rates serve as benchmarks for investors in many types of debt, including mortgage-backed and auto-loan securities.

Euribor-OIS Spread

The seasonally adjusted amount of U.S. commercial paper rose $4.2 billion to $932.6 billion outstanding in the week ended April 18, according to Fed data. Corporations sell commercial paper, typically maturing in 270 days or less, to fund everyday activities such as paying rent and salaries.

The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight indexed swaps, rose. The measure of banks’ reluctance to lend to one another was unchanged at 40 basis points.

The price on one-year cross-currency basis swaps between yen and U.S. dollars was minus 31.1 basis points, compared to minus 31.75 yesterday. A negative swap price indicates investors are willing to receive reduced interest payments on the yen they lend in order to obtain the needed financing in dollars.

Foreign-exchange swaps are typically for periods of less than a year, while cross-currency basis swaps usually range from one to 30 years. The latter are agreements in which a person borrows in one currency and simultaneously lends in a different currency. The trade involves the exchange of two different floating-rate payments, each denominated in a different currency and based on a different index.

To contact the reporter on this story: Liz Capo McCormick in New York at Emccormick7@bloomberg.net

To contact the editor responsible for this story: David Liedtka at dliedtka@bloomberg.net

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