By Richard Leong
NEW YORK, May 18 (Reuters) - Fears of a drop in funds for banks escalated on Tuesday after Germany said it will curb bets against certain stocks and euro government debt in a bid to combat speculation that has roiled global markets.
For money markets, this move could result in a scramble for cash to unwind these short positions, some of which are likely financed by interbank loans and repurchase agreements, analysts and traders said.
Compounding the anxiety of rising borrowing costs is the proposed overhaul of financial regulations in the United States, which analysts say will reduce banks' leverage but also hamper their ability to lend. For more, see
'Cash money market investors are being cautious at this point,' said Alex Roever, short-term fixed income strategist in J.P. Morgan Securities in New York.
Germany's financial watchdog Bafin is targeting naked short sales in the stocks of the country's top 10 financial companies and also in euro zone government bonds. There has been a huge build-up of this type of bet, in which a trader sells a financial instrument that he does not own or has not yet borrowed, as worries over Europe's sovereign debt crisis will hurt the continent's growth and company profits. See
Germany's temporary ban on these naked short bets is not unprecedented. During the height of the 2007-2008 global financial crisis, U.S. Securities and Exchange Commission temporarily prohibited short-selling of financial shares in the wake of the demise of Lehman Brothers.
'The market is trying to draw parallels between this and when SEC banned short selling of financials, except this is more opaque. Banning naked short selling of governments faces significant hurdles and is very difficult to implement and monitor,' said David Gottlieb, principal at EMF Financial Products in New York.
Stress levels in dollar money markets reached their highest levels since August 2009 as investors fretted that the European sovereign debt crisis needed more action to calm markets.
The benchmark London interbank offered rate on three-month dollars to 0.46469 percent on Tuesday. Equivalent Libor on euros dipped to 0.63000 percent, while that on sterling was unchanged at 0.69625 percent.
GOVERNMENT CLAMP-DOWN
Germany's temporary ban on naked short sales and the U.S. lawmakers' push to rein in bank risk-taking have fueled concerns of reduced liquidity and rising borrowing costs.
Those concerns manifested with a ballooning of the spread between U.S. interest rate swap rates and Treasury yields.
In the derivatives market, the two-year dollar swap spread, which widens with rising risk aversion, grew almost 5 basis points to 39.50 basis points late Tuesday.
This was the widest level since May 7 when the two-year swap spread blew out to about 43.00 basis points, a level not seen in nearly nine months. On that day, there was a safehaven stampede in Treasuries as the Dow Jones industrial average lost nearly 1,000 points for a brief moment amid worries over Europe's debt troubles.
Despite their jitters, investors are still willing to put money into securities issued by banks, albeit they have been demanding higher interest and shorter-dated instruments.
'They are shifting their preferences. They are asking for higher yields and shorter maturities,' J.P. Morgan's Roever said.
(Additional reporting by George Matlock in London; Editing by Diane Craft) Keywords: MARKETS MONEY (richard.leong@thomsonreuters.com ; +1 646 223 6313; Reuters Messaging: richard.leong.reuters.com@reuters.net ) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
NEW YORK, May 18 (Reuters) - Fears of a drop in funds for banks escalated on Tuesday after Germany said it will curb bets against certain stocks and euro government debt in a bid to combat speculation that has roiled global markets.
For money markets, this move could result in a scramble for cash to unwind these short positions, some of which are likely financed by interbank loans and repurchase agreements, analysts and traders said.
Compounding the anxiety of rising borrowing costs is the proposed overhaul of financial regulations in the United States, which analysts say will reduce banks' leverage but also hamper their ability to lend. For more, see
'Cash money market investors are being cautious at this point,' said Alex Roever, short-term fixed income strategist in J.P. Morgan Securities in New York.
Germany's financial watchdog Bafin is targeting naked short sales in the stocks of the country's top 10 financial companies and also in euro zone government bonds. There has been a huge build-up of this type of bet, in which a trader sells a financial instrument that he does not own or has not yet borrowed, as worries over Europe's sovereign debt crisis will hurt the continent's growth and company profits. See
Germany's temporary ban on these naked short bets is not unprecedented. During the height of the 2007-2008 global financial crisis, U.S. Securities and Exchange Commission temporarily prohibited short-selling of financial shares in the wake of the demise of Lehman Brothers.
'The market is trying to draw parallels between this and when SEC banned short selling of financials, except this is more opaque. Banning naked short selling of governments faces significant hurdles and is very difficult to implement and monitor,' said David Gottlieb, principal at EMF Financial Products in New York.
Stress levels in dollar money markets reached their highest levels since August 2009 as investors fretted that the European sovereign debt crisis needed more action to calm markets.
The benchmark London interbank offered rate on three-month dollars to 0.46469 percent on Tuesday. Equivalent Libor on euros dipped to 0.63000 percent, while that on sterling was unchanged at 0.69625 percent.
GOVERNMENT CLAMP-DOWN
Germany's temporary ban on naked short sales and the U.S. lawmakers' push to rein in bank risk-taking have fueled concerns of reduced liquidity and rising borrowing costs.
Those concerns manifested with a ballooning of the spread between U.S. interest rate swap rates and Treasury yields.
In the derivatives market, the two-year dollar swap spread, which widens with rising risk aversion, grew almost 5 basis points to 39.50 basis points late Tuesday.
This was the widest level since May 7 when the two-year swap spread blew out to about 43.00 basis points, a level not seen in nearly nine months. On that day, there was a safehaven stampede in Treasuries as the Dow Jones industrial average lost nearly 1,000 points for a brief moment amid worries over Europe's debt troubles.
Despite their jitters, investors are still willing to put money into securities issued by banks, albeit they have been demanding higher interest and shorter-dated instruments.
'They are shifting their preferences. They are asking for higher yields and shorter maturities,' J.P. Morgan's Roever said.
(Additional reporting by George Matlock in London; Editing by Diane Craft) Keywords: MARKETS MONEY (richard.leong@thomsonreuters.com ; +1 646 223 6313; Reuters Messaging: richard.leong.reuters.com@reuters.net ) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.