Strains across money markets intensified on Monday and are approaching levels last seen in mid-December when central banks announced liquidity provisions to alleviate year-end funding pressures.
This was illustrated by higher swap rates, which compare the difference between overnight lending rates set by central banks and three-month Libor, the rate at which banks lend to each other.
In the UK, this spread, known as the overnight index swap (OIS) rate, rose above 100 basis points on Monday and in the US increased to 80.6bp. In Europe, the OIS remained above 75bp. These are highly elevated levels and compare with swap rates of around 15bp before the credit crunch emerged last year.
Swap levels have reversed the relief that came after the Federal Reserve helped engineer the sale of Bear Stearns to JPMorgan and announced liquidity measures to alleviate stresses in the interbank system. Many analysts expected funding pressures would ease once banks had negotiated the end of the first quarter.
“Despite the best efforts of the Federal Reserve to lubricate the wheels of the funding markets, the fact remains that banks still hoard cash at nearly all costs,” said William O’Donnell, strategist at UBS.
“If banks are loath to lend cash to each other, it’s hard for us to see any stand-down from historically tight lending standards now being reflected to consumer and institutional borrowers.”
In Australia and New Zealand, OIS rates have exceeded the highs of last December and September. In Japan, Canada, Norway and Sweden, swap rates are approaching December’s peaks, a move that suggests global funding pressures are intensifying.
George Goncalves, treasury analyst at Morgan Stanley, said: “The global nature of the move wider in Libor-OIS spreads underscores our view that while financing market frictions may have started in the US, they are now quickly spreading to other economies.”
A sign banks and investors are clamouring for funding their dollar-based holdings, beyond borrowing from banks in the Libor market, is the elevation of dollar currency swaps. The swap of one currency for the dollar over a period can secure dollar financing.
According to Morgan Stanley, the difference between one-month Libor and the dollar currency forward is about 50bp, its widest level this decade. Last year, this spread only approached 30bp, up from less than 10bp, when Libor and OIS were distressed.
“This suggests to us that the demand for dollar funding is being driven by, not only weaker US banks, but also from institutions overseas that are seeking dollar funding,” said Mr Goncalves.
