Dollar-Funding Stress Levels Ease, Money-Market Indicators Show
Money-market forward indicators are signaling that strains in short term dollar funding are easing.
Three-month London interbank offered rate, or Libor, which represents the rate at which banks say it would cost to borrow from another, fell to 0.46760 percent from 0.46785 percent, where it had held since June 1, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks reluctance to lend, rose to 30.6 basis points from 30.1 basis points yesterday.
The difference between the two-year swap rate and the comparable-maturity Treasury note yield, known as the swap spread, narrowed 0.69 basis points to 23.94 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.
Predictions in the forward market for Libor-OIS, known as the FRA/OIS spread, were little change at 32.9 basis points, according to the second rolling three month contracts.
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.
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 50.96 basis points below Euribor, compared to 51.91 basis points below yesterday.
The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight indexed swaps, held steady. The measure of banks’ reluctance to lend to one another was little changed at 43 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 minus 33.6 basis points, from minus 35 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.
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