FLY IN BULLISH ONITMENT?

One-Month Dollar Libor at Three-Week High on Year-End Concern

By Kim-Mai Cutler and Candice Zachariahs

Nov. 28 (Bloomberg) -- The cost of borrowing in dollars for one month stayed at the highest level in three weeks as banks sought funding to bolster balance sheets through year-end amid a global squeeze on credit.
The London interbank offered rate, or Libor, that banks say they charge one another for such loans was unchanged at 1.90 percent today, British Bankers’ Association data showed. The rate rose the most in nine years yesterday. The overnight Libor climbed above the Federal Reserve’s target rate for the first time in almost a month, to 1.16 percent. The Libor-OIS spread, a measure of the willingness of banks to lend, also widened.
“One-month rates are the most sensitive at the moment,” said Sean Maloney, a fixed-income strategist in London at Nomura International Plc. “We are getting to month-end so the rate will cover the turn into 2009 and there’s very limited liquidity in the market.”
With a month to go until the end of 2008, banks are vying for loans that mature after Dec. 31 to strengthen their balance sheets as they prepare to report to investors. Financial institutions mark the value of loans and cash positions at the end of each quarter. The one-month Libor climbed 47 basis points yesterday, the most since 1999.
Banks are hoarding cash on concern interest-rate cuts and government spending plans will fail to avert the worst global slump since World War II. China’s economic deterioration is quickening as the financial crisis spreads, the nation’s top planner said yesterday.
Squeeze in Lending
Credit markets, which began seizing up after BNP Paribas SA halted withdrawals on three funds in August 2007, froze after Lehman Brothers Holdings Inc. collapsed on Sept. 15. Financial institutions posted almost $1 trillion of writedowns and credit losses since the start of 2007.
The Libor-OIS spread, a gauge of cash scarcity among banks favored by former Fed Chairman Alan Greenspan, widened four basis points to 182 basis points. The difference between what banks and the Treasury pay to borrow money for three months, known as the TED spread, rose two basis points to 218 basis points. The spread, which reached a low this year of 76 basis points in May, was at 464 basis points on Oct. 10, the most since Bloomberg began compiling the data in 1984.
“OIS-Libor spreads remain wide,” said Guillaume Baron, a fixed-income strategist at Societe Generale SA in Paris. “We have seen some improvement in conditions for euros, but not in dollars. We can’t explain why. The market’s crazy.”
ECB Deposits
The one-month euro interbank offered rate, or Euribor, that banks say they charge each other declined 4 basis points to 3.57 percent today, according to the European Banking Federation. It jumped 22 basis points yesterday, the most in a year. The three- month rate fell to the lowest level in 21 months, to 3.85 percent, the EBF said.
In a further indication of the squeeze in lending, the European Central Bank registered almost 205 billion euros ($263 billion) of cash deposited by banks yesterday in its overnight facility. It was the seventh straight day the figure surpassed 200 billion euros. The daily average in the first eight months of the year was 427 million euros.
Interest rates on U.S. commercial paper, or CP, rose to the highest level in more than three weeks, according to data compiled by Bloomberg. Rates on the highest-ranked 30-day CP climbed 25 basis points to 1.52 percent, or 52 basis points more than the Fed’s target rate, according to yields offered by companies and compiled by Bloomberg. CP, which matures in 270 days or less, is used by companies to finance daily expenses such as payroll and rent.
‘Trust Not Addressed’
Rates in Asia increased today. Singapore‘s interbank three- month offered rate for U.S. dollar loans, or Sibor, rose two basis points to 2.22 percent, capping the first weekly advance since Oct. 10. Australia’s three-month rate rose 16 basis points to 4.72 percent. South Korea’s one-year cross-currency swap was below zero for a sixth day, showing the nation’s banks are starved of U.S. currency.
“The provision of liquidity is only part of the problem, with solvency and trust still to be fully addressed,” Brian Verlaan, global head of fixed-income research in Singapore at Standard Chartered Plc, said in a note to clients today. “It is the latter that will take longest to mend, with liquidity continuing to be hoarded and interbank-lending activity confined to just the shortest tenors.”
Japan’s three-month rate jumped 3.7 basis points this week to 0.876 percent, the biggest gain since February 2007. A basis point is 0.01 percentage point.
Hong Kong‘s three-month interbank rate, Hibor, fell 4.5 basis points to 1.951 percent, paring its first weekly increase this month.
Libor, the benchmark for $360 trillion of financial products worldwide, is set by a panel of banks in a daily survey by the BBA before noon in London. Members give estimates for how much they would charge for loans ranging from one day to a year in currencies including the dollar, euro, yen and pound. Euribor is set about two hours earlier in a survey by the European Banking Federation. EBF members only give estimates for the cost of borrowing euros.