Libor surges to three-month high
March 12, 2009
By Matthew Brown and Liz Capo McCormick
The cost of borrowing in dollars for three months rose for an eleventh day in London, as banks sought cash to cover their commitments through the end of the first quarter.
The London interbank offered rate (Libor) that banks charge each other for such loans climbed by two basis points to 1.33 percent, the highest level since January 8, the British Bankers' Association said.
The Libor-OIS spread, a gauge of bank reluctance to lend, increased to the widest since January 9.
Banks are balking at lending amid a squeeze on cash towards the end of March on concern that more financial institutions will need to be rescued by governments following almost $1.2 trillion (R12.6 trillion) of write-downs and losses since the start of 2007.
On Wednesday Banco Popolare became the Italy's first lender to seek state aid. Lloyds Banking Group, the UK's largest mortgage provider, ceded control to the government at the weekend in return for state asset guarantees.
"The liquidity will be horrible in the next couple of weeks," said Vincent Chaigneau, the head of international rates strategy at Societe Generale in London.
"We have seen renewed stress in the Libor-OIS spread."
The spread, the difference between the three-month Libor for dollars and the overnight indexed swap rate, widened by two basis points to 107 basis points.
It averaged 11 basis points from December 2001 to July 2007 and soared to 364 basis points in the weeks following the September 15, 2008 bankruptcy of Lehman Brothers Holdings.
Contracts traded in the forward market show traders reduced bets on how much they expected the spread to widen this year. The so-called FRA/OIS spread, priced to March 2009, is about 112 basis points, compared with about 114 basis points on Tuesday, according to data compiled by Tullett Prebon, the second-biggest broker of transactions between banks. The March spread reached as low as about 57 basis points in January.
"There is also a general concern over the demand for dollar-based funding in Europe," said Meyrick Chapman, UBS' fixed-income strategist.
"Movement in cross-currency basis swaps signals that this demand has increased."
Financial institutions have been driven over the past year to tap alternative dollar funding sources, including derivatives such as cross-currency basis swaps.
The swaps, which usually range from one to 30 years, are agreements in which a person borrows in one currency and simultaneously lends in another.
The trade involves the exchange of two different floating rate payments, each denominated in a separate currency and based on a different index. - Bloomberg
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