Dollar-Funding Steady as Treasury Repo Rates Near 17-Month Low

Money-market forward indicators signaled short-term dollar funding conditions held steady as the rate to borrow Treasuries for one day in the repurchase agreement market held close to a 17-month low.

The overnight Treasury general collateral repurchase agreement rate opened today at 0.1 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 reached 0.018 percent on May 22, the lowest since December 30, 2011, when the rate was negative 0.001, according to a GCF repo index provided on a one-day lag by the Depository Trust & Clearing Corp. The DTCC index was 0.041 percent yesterday.

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, slide this month as repo rates declined as a seasonal build up of cash has triggered the Treasury department to cut bill issuance, limiting the amount of collateral in the funding markets. The fed effective was 0.08 percent yesterday, matching the rate of the prior day and the lowest since February.

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.

Libor Rates

Three-month London interbank offered rate, or Libor, held for a second day at 0.27275 percent, the lowest since August 2011, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks’ reluctance to lend, was little changed at 15.9 basis points.

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 17.9 basis points from 17.8 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, widened 0.4 basis points to 15.45 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 rose $19.8 billion to $1.0334 trillion in the week ended May 22, according to Fed data.

Euribor-OIS Spread

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 14.2 basis points below Euribor, compared with 14.5 basis points below yesterday.

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 held steady. The measure of banks’ reluctance to lend to one another was 13 basis points.

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