Money Market Rates Again Show Only Slight Improvement

Money markets showed a small improvement overseas once again today, again showing that massive central bank interventions are having an effect only around the margin. While overnight lending rates showed a fair bit of movement, rates at the three month level are still elevated, and more important, all signs are that very little in the way of interbank lending is happening beyond overnight.

From Bloomberg:

Money-market rates in London fell after central banks provided $254 billion of emergency cash to ease the paralysis in the credit markets and UBS AG got a $59 billion government bailout.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars declined for a fourth day, sliding 5 basis points to 4.50 percent today, the British Bankers’ Association said. The overnight rate fell 20 basis points to 1.94 percent, the lowest level since November 2004. Asian interbank rates also dropped.

“Lending rates between banks are generally coming down, albeit slowly,” said Su-Lin Ong, a senior economist at RBC Capital Markets Ltd. in Sydney. “The system’s been through incredible stress in the last month, so it’s not going to snap in overnight.”…

Policy makers are intensifying efforts to jolt credit markets back to life. The Bank of England said today it will delay the disclosure of emergency borrowing and reduce the penalty charged on overnight loans to eliminate the stigma of central bank assistance. The European Central Bank yesterday said it will also accept lower-rated securities as collateral when lending to banks and offer them as many euros as they want over the next six months.

“Central banks are throwing everything they can at the credit markets to get them working again,” said Win Thin, an economist at Brown Brothers Harriman & Co…

The Libor-OIS spread, a gauge of cash scarcity that measures the difference between the three-month dollar rate and the overnight indexed swap rate, narrowed 5 basis points to 340 basis points today. It was about 24 basis points in January and 11 basis points in the 10 years prior to August 2007, before the start of the credit squeeze.

“Libor rates have come down post rescue package announcements, but more importantly and worryingly there do not appear to be any significant cash transactions returning to the market yet,” said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Group Plc in London.

Our reader Marshall had e-mailed us yesterday:

Huge total in the European bank auctions today, and the collateral the ECB is taking is absolute dreck. Nobody is talking about this.

In addition, note that the improvement in three month Libor was teeny despite some institutions committing to lend out to that tenor. From the Financial Times:

A group of European co-operative lenders will resume unsecured lending of up to three months at the London interbank offered rate (Libor) in an effort to kickstart interbank lending.

The Unico Banking Group represents eight banks with a market share of 21 per cent of the European retail banking market, including France’s Crédit Agricole, Germany’s DZ Bank and Rabobank of the Netherlands….

“During the last months the interbank market has completely dried up,” Bert Heemskerk, Rabobank’s chief executive, said. “All of our banks are extremely solid. We thought why not go back to trusting each other?”

Interbank lending, even within the group, had been restricted mostly to overnight lending, he said, effectively wiping out three-month interbank lending. Loans had also often only been extended on a secured basis.

The agreement also covers Italy’s ICCREA Holding, Finland’s Pohjola Bank, Austria’s Raiffeisen Zentralbank, and Raiffeisen Switzerland.

However, Spain’s Banco Cooperativo, which is an “associate” rather than full member of Unico, is not participating.

The funding available within the group was between €10bn and €15bn ($13.5bn-$20.3bn), Unico said, adding that the initiative was a step towards restoring confidence in the European banking community.