Interbank Lending Squeeze May Be Back

The equity/credit market divergence continues. Bloomberg reports that money market rates in Europe are rising, suggesting increased pressure in the interbank funding market:

Money-market rates for euros and pounds climbed to the highest since mid-January, signaling the global squeeze on short-term bank lending may be returning.

The three-month London interbank offered rate, or Libor, for euros advanced 1 basis point to 4.40 percent today, the highest since Jan. 18, the British Bankers’ Association said. The rate for pounds gained half a basis point to 5.77 percent, the 12th straight daily increase and the highest level since Jan. 7, according to the BBA….

“We might be seeing the return of funding pressures in the interbank market,” a team of strategists at Citigroup Inc. led by New York-based Tom Fitzpatrick wrote in a report today…..

The difference between the rate banks charge for one-month dollar loans in London relative to the overnight indexed swap rate, the so-called Libor OIS spread used by the Fed as the minimum bid level at its auctions, suggested a decline in the availability of funds. The spread increased to 49 basis points today, from 30 basis points a week ago. It averaged 6 basis points in the first half of 2007 and 41 basis points since then.

Overnight indexed swaps are derivatives in which one party agrees to pay a fixed rate in exchange for receiving the average of a floating central bank rate over the life of the swap. For swaps based in U.S. dollars, the floating rate is the daily effective federal funds rate.

“Spreads remain elevated despite the close of the fiscal first quarter for brokers, reflecting in part elevated credit risk from financial balance-sheet issues,” Hans Mikkelsen, an analyst at Bank of America Corp. in New York, wrote in a report…..

The difference between what banks and the government pay for three-month loans also indicated an increased reluctance to lend. The so-called TED spread widened to 1.41 percentage point today, from 1.37 percentage point yesterday and 1 percentage point a month ago.

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