Thursday May 28, 03:42 PM
MONEY MARKETS-Sterling Libor rates edge up, dollar funds fall
By George Matlock
LONDON, May 28 (Reuters) - Bank-to-bank three-month dollar
borrowing costs fell on Thursday, snapping back from two days of
gains, while sterling funds rose, breaking three months of
declines.
Three-month sterling funds edged up to 1.27813 percent from 1.27625 percent on Wednesday, according to
Libor fixings from the British Bankers' Association.
'There has been a small amount of pressure on three-month
sterling rates, but this is rather small relative to the change
in OIS spreads,' said Peter Chatwell, a market strategist at
Calyon in London.
The spread expresses the three-month premium paid over
anticipated central bank rates, or Overnight Index Swap rates
and is seen as a gauge of banks' willingness to lend to each
other -- a wider spread is seen as an indication of decreased
inclination to lend.
'We would expect sterling Libor-OIS to continue to resist
the narrowing that we have seen in dollars and euros recently as
bank certificate of deposits cannot be pledged to the Bank of
England, hence they remain less attractive relative to the bill
market,' Chatwell added.
The spread of three-month London interbank offered rates
over OIS rates for dollars and sterling held steady while for
euros edged higher on Thursday.
For the previous two days the dollar rate edged higher,
leaving some market observers to reason that interbank Libor
rates' plunge to record lows since March had gone too far as
banks gradually reduced reliance on central bank funding
facilities.
'Three-month dollar rates have tightened slightly.
Interestingly there is less dispersion amongst the contributors,
suggesting further stabilisation of Libor settings between
banks,' said Calyon's Chatwell.
But an edge higher by euro Libor rates came in the wake of a
halt to a week-long rise in three-month Euribor interbank
lending rates.
Sharp cuts in interest rates and the European Central Bank's
pouring of hundreds of billions of euros into money markets have
helped drive Euribor rates down to record lows. They have fallen
more than 400 basis points since the collapse of U.S. bank
Lehman Brothers (NYSE: LEH - news) led rates to spike to historic highs of 5.393
percent.
'Euro Libors are remaining relatively static relative to OIS
spreads, so these rises we see in the three-month rate are more
to do with the ongoing normalisation in OIS,' Chatwell added.
But current rate ranges are still above long-term averages
because of persistent concerns about counterparty risk after the
Lehman collapses.
On Wednesday, ECB Governing Council member Christian Noyer
said credit conditions had toughened slightly but were better
than back in 2000-2001.
He said the main problem in the banking sector was the rise
in the cost of risk linked to the economic crisis itself.
RATES STILL TO FALL?
The modest rise in three-month dollar Libor rates earlier
this week was considered to be short-term and primarily driven
by technical factors, said Lena Komileva, head of G7 market
economics at Tullett Prebon (LSE: TLPR.L - news) in London.
'Technical factors,' she said, 'such as the approaching
expiration of the benchmark June future and calendar effects
associated with the inclusion of the quarter turns in the most
liquid 1m and 3m Libor maturities from next week.
But Komileva said the market views rates as having fallen
too low and 'there is doubt as to whether there is enough
transparency about risk exposure in the international banking
system. This support our cautious position on sounding the
all-clear on financial systemic risks.'
(Editing by Toby Chopra)
Keywords: MONEY MARKETS INTERBANK
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