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Money Markets – Benchmark dlr rates at new lows, H1 end eyed

Posted on: June 16, 2009


Reuters – Wednesday, June 17

* Benchmark dollar borrowing costs mark new low

* Calm run-up to end of H1 seen

* BoJ hold rates, RBA sees no need to cut for now

By Kirsten Donovan

LONDON, June 16 – Benchmark bank-to-bank dollar funding costs marked new lows on Tuesday as credit conditions continued to improve gradually and on indications funding needs at the end of the first half of the year would be filled in an orderly manner.

With the end of June approaching, Libor/OIS spreads, or the three-month premiums paid over anticipated central bank rates, remained near their recent lows after gradually grinding tighter throughout this year.

“Ahead of the end of the quarter and the crucial IMM derivatives settlement date later this week…the relatively mild re-widening of spreads in recent weeks may be seen as an encouraging sign that the liquidity squeeze is over and that the substantial central bank actions to shore up the very short end have been a success,” said Nomura rate strategist Sean Maloney.

The three-month dollar London interbank offered rate was fixed at 0.61313 percent — a new low and down from 0.61438 percent on Monday <USD3MFSR=>. The three-month Libor/OIS spread was steady at 41 basis points

Equivalent euro rates <EUR3MFSR=> fixed half a basis point lower at 1.24750 percent and the three-month spread was steady at 50 basis points. For full details of Tuesday’s fixings see [ID:nLG461926]

The rates are indicative levels of what price banks believe they can secure funds at. Traded deposit rates for three-month dollars <USD3MD=> and sterling <GBP3MD=> have however shown signs of turning higher in recent weeks, in line with upwards moves in other rates markets.

Interest rate futures have fallen <0#FF:><0#FSS:><0#FEI>, giving higher implied yields, while government bond yields and swap rates have risen since Mid-May as markets take the view that central banks will not ease policy further and the next move will be to higher rates, even if not any time soon.

But in a sign that things are still far from normal, the European Central Bank warned on Monday that euro zone banks will probably need to write down another $283 billion on bad loans and securities over the next 18 months.

The sum, reported in the bank’s semi-annual Financial Stability Report, comes on top of an estimated $366 billion in writedowns by euro zone banks since the start of the financial crisis in mid-2007 [ID:nLF804645].

” certainly poses a tough challenge to those who would believe that financial stability has made a firm and sustained comeback,” Societe Generale strategists said in a note.

The ECB allotted 309.6 billion euros in its latest 7-day financing operation, against a benchmark requirement of 293.5 billion euros and a maturing amount of 302 billion euros.

Analysts believe that banks are saving their collateral for the ECB’s first 1-year unlimited tender of funds later this month.

“The sentiment is that demand for this tender is going to be significant,” said BNP Paribas rate strategist Matteo Regesta.

Meanwhile, the amount commercial banks deposited overnight at the ECB inched down towards recent 8-1/2 month lows [ID:nFAT004747].

CENTRAL BANKS ON HOLD

Elsewhere, Australian interest rate swaps slipped on Tuesday as the central bank’s minutes hinted it was ready to ease monetary policy again if needed, while a Bank of Japan policy review suggested it was in no hurry to end extraordinary policy measures.

Minutes of the June 2 meeting, released on Tuesday, backed market speculation that the Reserve Bank of Australia was done cutting rates for some time to come, but also indicated it was ready to move in if the situation warranted. [ID:nSYD466413]

Australian interest rate swaps eased marginally and bill futures ticked higher.

The Bank of Japan kept interest rates on hold at 0.1 percent at the end of a two-day policy review on Tuesday and held off on any new initiatives, as widely expected.

It gave no indications on whether it is ready to end extraordinary policies such as buying corporate bonds and commercial paper to aid corporate financing.

 (Additional reporting by Umesh Desail; editing by Stephen Nisbet)

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