Money Market Indicators Signal Banking-Sector Stress Stabilized

May 17 (Bloomberg) -- Money-market indicators signaled the ability of banks to borrow and lend short-term funds stabilized as the gap between the London interbank offered rate and the Federal funds rate was unchanged.

The three-month London interbank offered rate, or Libor, which represents the rate at which banks say it would cost to borrow from another, was 0.46685 percent, unchanged, according to the British Bankers’ Association.

The Libor-OIS spread, a gauge of banks’ reluctance to lend, was unchanged at 30.8 basis points. The gap is at the lowest since October. Overnight index swaps, or OIS, give traders predictions on where the Federal Reserve’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, widened to 42.3 basis points from 41.9 basis points yesterday, according to the second rolling three-month contract period.

The difference between the two-year swap rate and the comparable-maturity Treasury note yield, known as the swap spread, widened 0.4 basis points to 36.63 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.

The cost for European banks to convert euro-denominated payment streams into dollars-based funding via the cross currency swaps market narrowed. The three-month cross-currency basis swap was 49.3 basis points below Euribor, compared to 51.2 basis points below yesterday.

Euribor-OIS Spread

The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight indexed swaps, narrowed. The measure of banks’ reluctance to lend to one another was 38 basis points, compared with 38.5 basis points yesterday.

The seasonally adjusted amount of U.S. commercial paper surged $26.4 billion to $966.4 billion outstanding in the week ended May 9, according to Fed data. During the two-week period ended May 9, the market has expanded $40.5 billion, the biggest increase since $40.8 billion for the comparable period ended May 25, 2011, according to Fed data compiled by Bloomberg.

The price on one-year cross-currency basis swaps between yen and U.S. dollars was negative 35.8 basis points, compared with negative 34.8 basis points 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

To contact the editor responsible for this story: David Liedtka at