Post by Sapphire Capital on Aug 15, 2008 20:57:15 GMT 4
Aug. 15 (Bloomberg) -- Interest-rate derivatives are signaling that the availability of funds has declined in the three days since the Federal Reserve made longer-term financing available to banks under its emerging lending program.
The difference, or spread, between the three-month dollar London interbank offered rate and the overnight index swap rate on contracts trading in the forwards market to December widened to 88 basis points from 84 basis points yesterday, according to Tullett Prebon Plc. The spread is an indirect measure of the availability of funds and banks' willingness to lend. For immediate delivery, the Libor-OIS spread has held steady at a three-month high of about 77 basis points this week.
The central bank auctioned $25 billion of 84-day loans to commercial banks on Aug. 11 under the Term Auction Facility, in addition to the sales of $935 billion in 28-day loans that have occurred since the program began in December. Banks and financial institutions have raised $352 billion of capital, while writing down $503 billion in losses related to the U.S. subprime mortgage crisis and the ensuing credit crunch since the start of 2007, according to data compiled by Bloomberg.
``A further narrowing of the three-month Libor-OIS spreads is contingent on continued capital raising by the banks,'' said Nick Parsons, head of markets strategy in London at NabCapital, a unit of National Australia Bank Ltd, the country's largest bank. ``The underlying issue here is that it is not the responsibility of the authorities to be providing permanent additions of longer-term liquidity. It's the job of the banking system to raise capital.''
Financial institutions submitted bids equaling over two times the $25 billion in 84-day loans auctioned.
Forward Spreads Widen
The 84-day TAF results and the subsequent movement this week in Libor-OIS forwards ``highlight that all these problems still exist as far as the need for capital and banks' lack of willingness to lend,'' said Ira Jersey, an interest-rate strategist at Credit Suisse Holdings USA Inc. in New York. ``We are going to keep on having these liquidity pressures.''
In the forward market priced to March 2009, the three-month dollar Libor-OIS spread widened to 67 basis points from about 65 basis points yesterday. The difference was 60 basis points on Aug. 12, before the 84-day TAF results were announced, according to Credit Suisse data.
Overnight indexed swaps rates signal what traders predict the Fed's daily effective federal funds rate will average over the time period.
Tighter Credit Standards
Bank lending standards have tightened even after the Fed reduced its main lending rate 3.25 percentage points to 2 percent since September and provided the emergency funds.
The Fed said this week in its quarterly lending survey that banks tightened credit standards for consumers and business borrowers since April as defaults and delinquencies on home loans climbed. About 75 percent of U.S. banks surveyed indicated they increased standards on prime mortgage loans, up from 60 percent in the previous survey, the Fed said.
The loan survey ``was pretty scary,'' wrote former Fed Governor Laurence Meyer, now vice chairman of Macroeconomic Advisers LLC, in a note on Aug. 11. ``Given how much bank credit is tightening, and given that it shows no signs of stabilizing, one has to believe that the risk of a more abrupt slowdown is considerable.''
source: Liz Capo McCormick Emccormick7@bloomberg.net
The difference, or spread, between the three-month dollar London interbank offered rate and the overnight index swap rate on contracts trading in the forwards market to December widened to 88 basis points from 84 basis points yesterday, according to Tullett Prebon Plc. The spread is an indirect measure of the availability of funds and banks' willingness to lend. For immediate delivery, the Libor-OIS spread has held steady at a three-month high of about 77 basis points this week.
The central bank auctioned $25 billion of 84-day loans to commercial banks on Aug. 11 under the Term Auction Facility, in addition to the sales of $935 billion in 28-day loans that have occurred since the program began in December. Banks and financial institutions have raised $352 billion of capital, while writing down $503 billion in losses related to the U.S. subprime mortgage crisis and the ensuing credit crunch since the start of 2007, according to data compiled by Bloomberg.
``A further narrowing of the three-month Libor-OIS spreads is contingent on continued capital raising by the banks,'' said Nick Parsons, head of markets strategy in London at NabCapital, a unit of National Australia Bank Ltd, the country's largest bank. ``The underlying issue here is that it is not the responsibility of the authorities to be providing permanent additions of longer-term liquidity. It's the job of the banking system to raise capital.''
Financial institutions submitted bids equaling over two times the $25 billion in 84-day loans auctioned.
Forward Spreads Widen
The 84-day TAF results and the subsequent movement this week in Libor-OIS forwards ``highlight that all these problems still exist as far as the need for capital and banks' lack of willingness to lend,'' said Ira Jersey, an interest-rate strategist at Credit Suisse Holdings USA Inc. in New York. ``We are going to keep on having these liquidity pressures.''
In the forward market priced to March 2009, the three-month dollar Libor-OIS spread widened to 67 basis points from about 65 basis points yesterday. The difference was 60 basis points on Aug. 12, before the 84-day TAF results were announced, according to Credit Suisse data.
Overnight indexed swaps rates signal what traders predict the Fed's daily effective federal funds rate will average over the time period.
Tighter Credit Standards
Bank lending standards have tightened even after the Fed reduced its main lending rate 3.25 percentage points to 2 percent since September and provided the emergency funds.
The Fed said this week in its quarterly lending survey that banks tightened credit standards for consumers and business borrowers since April as defaults and delinquencies on home loans climbed. About 75 percent of U.S. banks surveyed indicated they increased standards on prime mortgage loans, up from 60 percent in the previous survey, the Fed said.
The loan survey ``was pretty scary,'' wrote former Fed Governor Laurence Meyer, now vice chairman of Macroeconomic Advisers LLC, in a note on Aug. 11. ``Given how much bank credit is tightening, and given that it shows no signs of stabilizing, one has to believe that the risk of a more abrupt slowdown is considerable.''
source: Liz Capo McCormick Emccormick7@bloomberg.net