Dollar-Funding Stress Levels Ease, Money-Market Indicators Show

Money-market indicators signaled strains in short term dollar funding eased as the gap narrowed between the London interbank offered rate and the federal funds rate projected by the forward market.

Three-month London interbank offered rate, or Libor, which represents the rate at which banks say it would cost to borrow from another, was 0.46785 percent, where it has held since June 1, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks reluctance to lend, was unchanged at 30.6 basis points.

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, narrowed to 34.8 basis points from 36.1 basis points yesterday, according to the second rolling three month contracts.

The difference between the two-year swap rate and the comparable-maturity Treasury note yield, known as the swap spread, narrowed 0.31 basis point to 25.63 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 decreased. The three-month cross-currency basis swap was 50.3 basis points below Euribor, compared with 52.8 basis points below yesterday.

Euribor-OIS Spread

The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight indexed swaps, was unchanged. The measure of banks’ reluctance to lend to one another held at 44 basis points.

The seasonally adjusted amount of U.S. commercial paper fell $6.7 billion to $1.007 trillion in the week ended June 13, the second consecutive slide, according to Federal Reserve data.

The price on one-year cross-currency basis swaps between yen and U.S. dollars was little changed at minus 36.4 basis points. 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.