Money-market forward indicators signaled little change in short-term dollar funding conditions.
Three-month London interbank offered rate, or Libor, was unchanged at 0.23925 percent, close to the record low of 0.23585 percent on Oct. 28, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks’ reluctance to lend, was little changed at 15 basis points.
Three-month dollar Libor, which has fallen 0.305 percent at the start of this year and 0.583 percent a year before that, may be close to “its bottom”, according to Andrew Hollenhorst, fixed-income strategist at Citigroup Inc. in New York.
For Libor, “further sustained declines are unlikely,” Hollenhorst wrote in a note today. “Three-month financial commercial paper rates, which directly measure three-month unsecured bank borrowing costs, have moved sideways since September. Since prime money market mutual funds actively evaluate the relative value between lending through repurchase agreements or commercial paper, commercial paper rates may resist moving lower. The very stable relationship between 3-month Libor, and 3-month commercial paper would then imply that Libor will remain close to current levels.”
Overnight index swaps, or OIS, give traders predictions on what 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, was little changed at 16.5 basis points, and down a high over the past two months of 23.3 on Oct. 8, 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 0.44 basis points to 11.3 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 seasonally adjusted amount of U.S. commercial paper fell $11.2 billion to $1.07 trillion in the week ended Nov. 6, according to Fed data.
The cost for European banks to convert euro-denominated payment streams into dollars-based funding via the cross currency swaps market held steady and near its lowest January 2008. The three-month cross-currency basis swap was 3.4 basis points below Euribor, after touched 2.7 basis points below on Nov. 8, the lowest since Jan. 24, 2008.
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.
The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight indexed swaps was little changed. The measure of banks’ reluctance to lend to one another was 10.6 basis points.
The overnight Treasury general collateral repurchase agreement rate opened today at 0.10 percent, according to ICAP Plc, the world’s largest inter-dealer broker.
The average rate for borrowing and lending Treasuries for one day in the repo market was 0.097 percent yesterday, according to a GCF repo index provided on a one-day lag by the Depository Trust & Clearing Corp.
Securities dealers use repos to finance holdings and increase leverage. Securities that can be borrowed at interest rates close to the Fed’s target rate are called general collateral. Those in highest demand have lower rates and are called “special.”
The average rate for overnight federal funds, known as the fed effective rate, was 0.08 percent yesterday. The rate opened today at 0.08 percent. The effective rate is a volume-weighted average of trades between major brokers for overnight funds, reported on a day lag by the Federal Reserve Bank of New York.