The market for borrowing and lending European government bonds, the so-called repo market, is highlighting the stress created by Europe’s debt crisis as short-term bank funding rates exceed longer-term costs.
The rate for a one-day euro repurchase agreement, in which a bank or investor borrows money while putting up collateral, is 15 basis points, compared with 11 basis points on three-month contracts, according to the European Banking Federation. The so-called inverted curve signals strain in bank funding.
Short-term financing rates are being driven higher as banks seek AAA rated securities for collateral as Europe’s debt crisis roils bond markets. Spanish five-year note yields jumped to more than 6 percent for the first time since November after Bank of Spain Governor Miguel Angel Fernandez Ordonez quit amid criticism over the nationalization of Bankia group.
“The curve is inverted,” said Achilleas Georgolopoulos, a fixed-income strategist at Lloyds Banking Group Plc in London. “The market tensions about recapitalizing Spain’s banks and its effects on the sovereign are making it more expensive for short-term repos. Within a year the banks could be in a better state, but at the moment there are a lot of market tensions.”
The difference between the one-day and three-month repo rates is 3.7 basis points, near the widest in three months and up from one basis point on May 1, Brussels-based EBF data show.
The cost for European banks to borrow in dollars rose to the highest in a week. The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was 50 basis points below the euro interbank offered rate at 2:50 p.m. in London from minus 47 yesterday, data compiled by Bloomberg show.
The one-year basis swap was 65 basis points below Euribor from minus 63 yesterday. A basis point is 0.01 percentage point.
Prices in the forward market for three-month Euribor relative to overnight indexed swaps -- known as the FRA/OIS spread -- fell to 32 basis points from 33.5 yesterday. A decrease signals banks are more willing to lend.
The measure was as high as 70.5 basis points in November before the European Central Bank started its program of providing banks with cheap loans to buoy credit markets.
“We have massive liquidity from the ECB which keeps these measures down and on the other side there is banking stress coming into the market,” said Georgolopoulos. “There’s a battle over which will win.”
Lenders increased overnight deposits at the Frankfurt-based ECB yesterday, placing 760 billion euros ($947 billion) from 742 billion euros the day before.
Three-month Euribor, the rate banks say they pay for loans over that period in euros, fell to 0.671 percent from 0.673 percent, while one-week Euribor was 0.317 percent from 0.319 percent. The London interbank offered rate, or Libor, for three-month dollar loans was unchanged at 0.467 percent.
Three-month Euribor USD, a gauge of dollar funding costs from the Brussels-based EBF, rose to 0.922 percent from 0.919 percent.