More Improvement in Money Market Conditions

While none of the changes in interest rates were dramatic, and both interbank rates and stress levels remain elevated, improvement continues and all the metrics moved in the right direction.

From Bloomberg:

Money-market rates in London declined as cash injections by European central banks showed signs of easing the paralysis among lenders.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars fell 4 basis points to 3.47 percent today, its 12th straight drop, according to the British Bankers’ Association. The comparable euro rate slid 5 basis points to 4.85 percent, the lowest level since April 28. Rates for the U.K. pound were also lower…

The European Central Bank today lent financial institutions 325.1 billion euros ($408 billion), the most in 10 months. The Bank of England loaned $3 billion of overnight cash today, after allotting the same amount yesterday.

Singapore’s comparable rate for U.S. dollars fell 4 basis points to 3.48 percent, its 10th straight decline since reaching 4.8 percent on Oct. 13, the highest level this year. Hong Kong’s three-month interbank lending rate, or Hibor, increased 10 basis points to 3.84 percent today, the highest since Oct. 17.

While money-market rates have declined, the three-month Libor for dollars remains 197 basis points above the Federal Reserve’s target rate for overnight loans of 1.5 percent and up from 81 basis points about three months ago. At the start of the year, the spread was 43 basis points.

In a further sign some banks remain wary of lending to each other, financial institutions lodged 213.1 billion euros in the ECB’s overnight deposit facility yesterday, up from 202.6 billion euros the previous day. The daily average in the first eight months of the year was 427 million euros.

The Libor-OIS spread, a measure of cash scarcity, narrowed 5 basis points to 258 basis points today, down from 345 basis points two weeks ago. It was at 87 points before Lehman filed for bankruptcy protection.

The difference between what banks and the U.S. Treasury pay to borrow for three months, the so-called TED spread, narrowed 14 basis points to 262 basis points, compared with 436 basis points two weeks ago.

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  1. Anonymous

    This is good news! Our great overloads, I mean bankers, really deserve a new pay raise for their selfless efforts to resolve this crisis.

  2. Anonymous

    Just when you thought it was all calming down and those interbank rates were still coming down (we should note they rose on friday), another cog flies of the wheel.
    The recent Treasury TIPS auction was pretty dismal.
    Still with rumours that pension funds need to increase their portfolios of equities (dumping bonds)to meet end of month targets, on the face of it things should continue to improve.

  3. Mike Sankowski

    Note that the rates are coming down on increasingly longer tenors. First it was overnight, now the 1 week and 1 month are normalizing. the three month is still quite bad, but it is getting better.

  4. FairEconomist

    The European Central Bank today lent financial institutions 325.1 billion euros

    financial institutions lodged 213.1 billion euros in the ECB’s overnight deposit facility yesterday

    That sure sounds like it’s helping. /snark

    67 billion in 3-month commercial paper went through yesterday, which I assume was the Fed CP facility going through. Effect on credit indicators? A2/P2 scarcely changed at 4.35

    IMO the fact that interbank lending is improving – somewhat – but but usable credit is essentially unaffected is grim. I’ve stated my opinion many times – the spreads are default predictions. Massive bailouts have reduced (but tellingly not eliminated) bank default probabilities but bailing the banks is doing nothing for the real economy.

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