By Richard Leong and Emelia Sithole-Matarise
NEW YORK/LONDON, May 25 (Reuters) - The cost for banks to borrow dollars from each other rose to a 10-month high on Tuesday on fears over the European economy and U.S. financial regulatory reform.
Not only are interbank loan costs rising, but it has become more expensive for banks, especially European ones, to raise funds from the commercial paper market, analysts said.
The swift rise in dollar interbank loan rates since mid-March has unnerved some traders, who likened this move as the precipice of the credit squeeze during the 2007-2009 credit crisis that led to the demise of Lehman Brothers.
Investors have been worried euro zone banks could sustain billions in losses from the region's sovereign debt crisis, while proposed tighter rules and less government support for banks would reduce the credit-worthiness of U.S. banks.
Money markets are 'pricing in for a credit crunch,' said Michael Pond, Treasury strategist at Barclays Capital in New York. 'A crisis of confidence is developing once again.'
The Bank of Spain's weekend rescue of CajaSur, a regional savings bank, heightened anxiety over the soundness of the banks in the euro zone.
All these worries together have roiled financial markets worldwide, causing a safe-haven stampede into cash, U.S. Treasuries and German Bunds.
The European Central Bank, the U.S. Federal Reserve and other major central banks have coordinated efforts to ensure liquidity in the financial system. They also signaled they are unlikely to raise interest rates any time soon.
PREFERENCE FOR DOLLARS
Uneasiness over the euro zone's future and its 16-member currency has bolstered the demand for dollars.
'It's a run for dollar liquidity. Everybody wants to move out of the euro and wants dollars, so the problem is access to dollar liquidity is strained,' said Patrick Jacq, a strategist at BNP Paribas in Paris.
The London interbank offered rate for three-month dollars hit a 10-month high at 0.53625 percent, while the equivalent Libor on euros rose to 0.63875 percent, the highest since early January, the British Bankers' Association reported. For more, see
Libor is a rate benchmark for about $370 trillion in financial products worldwide.
Traders are betting three-month Libor will climb to 0.7 percent for the first time in a year in the next four weeks, according to a Reuters poll. For more, see
The two-year U.S. swap spread, a key gauge of financial system stress, touched 64.50 basis points, a level not seen in 14 months. It ended flat on the day with a late-day rally on Wall Street.
The equivalent euro swap spread pushed out to 91 basis points, the widest in 16 months, Reuters charts showed.
An ongoing increase in borrowing costs will certainly be a squeeze on banks and the global economy. But costlier interbank loans and commercial paper appear isolated for now, not rippling across other parts of the credit markets.
Banks can still borrow with relative ease in the federal funds and repurchase markets, analysts and investors said.
'You don't see the stress in those markets,' said David Glocke, head of taxable money market funds at Vanguard, a large U.S. fund operator in Malvern, Pennsylvania.
COMMERCIAL PAPER
As the jump in Libor caught even the attention of stock traders on Tuesday, there are growing concerns that the next leg of the euro zone debt problem has spilled into the commercial paper market, analysts said.
Major investors, including money market mutual funds, have gotten rid of their investments in Greece and reduced their exposure to Spain and Portugal, according to a recent report from Fitch. For more, see
Investors are demanding higher interest rates on most commercial paper issued by European banks than they demand from their U.S. counterparts. In some cases, the difference between the European bank CP and U.S. bank CP have been running more than 0.50 percentage point, market sources said.
Furthermore, risk-averse money managers are favoring commercial paper due in a week or less or long-dated issues from top-rated financial companies, analysts said.
Top-rated banks issued $8.164 billion in CP due overnight to four days on Monday, up from $5.335 billion on Friday, while bank CP issuance due in 81 days or longer totaled $1.228 billion, up from $248 million on Friday, according to Fed data released on Tuesday.
On the other hand, issuance of other CP maturities fell sharply on Monday from last Friday.
(Additional reporting by Umesh Desai in Hong Kong; Editing by Dan Grebler) 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/LONDON, May 25 (Reuters) - The cost for banks to borrow dollars from each other rose to a 10-month high on Tuesday on fears over the European economy and U.S. financial regulatory reform.
Not only are interbank loan costs rising, but it has become more expensive for banks, especially European ones, to raise funds from the commercial paper market, analysts said.
The swift rise in dollar interbank loan rates since mid-March has unnerved some traders, who likened this move as the precipice of the credit squeeze during the 2007-2009 credit crisis that led to the demise of Lehman Brothers.
Investors have been worried euro zone banks could sustain billions in losses from the region's sovereign debt crisis, while proposed tighter rules and less government support for banks would reduce the credit-worthiness of U.S. banks.
Money markets are 'pricing in for a credit crunch,' said Michael Pond, Treasury strategist at Barclays Capital in New York. 'A crisis of confidence is developing once again.'
The Bank of Spain's weekend rescue of CajaSur, a regional savings bank, heightened anxiety over the soundness of the banks in the euro zone.
All these worries together have roiled financial markets worldwide, causing a safe-haven stampede into cash, U.S. Treasuries and German Bunds.
The European Central Bank, the U.S. Federal Reserve and other major central banks have coordinated efforts to ensure liquidity in the financial system. They also signaled they are unlikely to raise interest rates any time soon.
PREFERENCE FOR DOLLARS
Uneasiness over the euro zone's future and its 16-member currency has bolstered the demand for dollars.
'It's a run for dollar liquidity. Everybody wants to move out of the euro and wants dollars, so the problem is access to dollar liquidity is strained,' said Patrick Jacq, a strategist at BNP Paribas in Paris.
The London interbank offered rate for three-month dollars hit a 10-month high at 0.53625 percent, while the equivalent Libor on euros rose to 0.63875 percent, the highest since early January, the British Bankers' Association reported. For more, see
Libor is a rate benchmark for about $370 trillion in financial products worldwide.
Traders are betting three-month Libor will climb to 0.7 percent for the first time in a year in the next four weeks, according to a Reuters poll. For more, see
The two-year U.S. swap spread, a key gauge of financial system stress, touched 64.50 basis points, a level not seen in 14 months. It ended flat on the day with a late-day rally on Wall Street.
The equivalent euro swap spread pushed out to 91 basis points, the widest in 16 months, Reuters charts showed.
An ongoing increase in borrowing costs will certainly be a squeeze on banks and the global economy. But costlier interbank loans and commercial paper appear isolated for now, not rippling across other parts of the credit markets.
Banks can still borrow with relative ease in the federal funds and repurchase markets, analysts and investors said.
'You don't see the stress in those markets,' said David Glocke, head of taxable money market funds at Vanguard, a large U.S. fund operator in Malvern, Pennsylvania.
COMMERCIAL PAPER
As the jump in Libor caught even the attention of stock traders on Tuesday, there are growing concerns that the next leg of the euro zone debt problem has spilled into the commercial paper market, analysts said.
Major investors, including money market mutual funds, have gotten rid of their investments in Greece and reduced their exposure to Spain and Portugal, according to a recent report from Fitch. For more, see
Investors are demanding higher interest rates on most commercial paper issued by European banks than they demand from their U.S. counterparts. In some cases, the difference between the European bank CP and U.S. bank CP have been running more than 0.50 percentage point, market sources said.
Furthermore, risk-averse money managers are favoring commercial paper due in a week or less or long-dated issues from top-rated financial companies, analysts said.
Top-rated banks issued $8.164 billion in CP due overnight to four days on Monday, up from $5.335 billion on Friday, while bank CP issuance due in 81 days or longer totaled $1.228 billion, up from $248 million on Friday, according to Fed data released on Tuesday.
On the other hand, issuance of other CP maturities fell sharply on Monday from last Friday.
(Additional reporting by Umesh Desai in Hong Kong; Editing by Dan Grebler) 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.