Post by Sapphire Capital on Jul 16, 2008 21:59:37 GMT 4
July 16 (Bloomberg) -- Interest-rate derivatives traders are increasingly betting that banks' difficulties shoring up balance sheets won't abate this year.
The difference, or spread, between the dollar London interbank offered rate and the overnight index swap rate on contracts trading in the forwards market reached all-time highs this week, according to data tracked by Lehman Brothers Holdings Inc. The spread is an indirect measure of the availability of funds in the money market and of banks' willingness to lend. Forwards signal what traders expect in the future.
Investors weren't reassured after Treasury Secretary Henry Paulson's announced plans this week to help rescue Fannie Mae and Freddie Mac, the largest U.S. mortgage lenders. Investors are also wary bank failures may spread after the collapse of IndyMac Bancorp Inc. earlier this month.
``Forward Libor-OIS spreads are at historical highs and even spot levels are approaching mid-March levels, as funding pressures remain elevated,'' said Priya Misra, an interest-rate strategist at New York-based Lehman. There is ``nervousness heading into banks' earning season.''
The three-month Libor-OIS spread traded forward to December 15, when the December Eurodollar futures contract expires, is 75.5 basis points, according to Tullett Prebon Plc. Eurodollar futures are priced at expiration to three-month dollar Libor. The spot three-month dollar Libor-OIS spread is 76 basis points today, up from about 70 basis points at the end of last month. The spot spread peaked last year at 106 basis points in December.
U.S. Stocks Slide
U.S. stocks have dropped this week amid concern that bank writedowns will increase, with shares of Citigroup Inc. plunging yesterday to the lowest level since the company was created through a merger in October 1998. Fannie Mae and Freddie Mac, known as government-sponsored enterprises, or GSEs, have each lost more than half their market capitalization in the past week.
The world's biggest financial services companies have posted more than $417 billion of losses and writedowns tied to the mortgage-market collapse, according to Bloomberg data
``It's a classic case of words not being enough, and that the markets need more concrete action,'' said Moorad Choudhry, an economics professor at London Metropolitan University and author of `Bank Asset and Liability Management.' ``There are more writedowns expected and speculation of the possibly of other financial firms going bust.''
Risks of Slowdown
Overnight indexed swaps rates signal what traders' predict the Federal Reserve's daily effective federal funds rate will average over the time period.
Fed Chairman Ben S. Bernanke, in testimony to the Senate Banking Committee yesterday, said that risks of an economic slowdown and higher inflation are increasing.
``Libor-OIS spreads are widening, in part, due to expectations of more and longer-term bank recapitalization needs,'' said Stan Jonas, who trades interest-rate derivatives at Axiom Management Partners LLC in New York. ``The end of the year will be brutal. There are also fears that the impact of the GSE's problems may cause the Fed to overshoot on rates to the downside, which lowers overnight index swap rates relative to Libor.''
Futures contracts traded on the Chicago Board of Trade show a 93 percent probability that the Federal Reserve will keep its target rate for overnight loans unchanged at 2 percent at the Aug. 5 meeting. That is up from 23 percent a month ago, when the remainder of bets had been for an increase. Traders see a 50 percent chance policy makers will keep borrowing costs steady in December, up from zero odds a month ago and 24.9 percent a week ago.
Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events, such as changes in the weather.
``Libor-OIS has remained stubbornly wide as balance sheet pressures remain and investment banks continue to de-lever,'' wrote Terry Belton, global head of fixed income and foreign exchange strategy in New York at JPMorgan, a unit of the third- largest U.S. bank by assets, in a note on July 11. ``While we had expected some relief after quarter end, the modest widening so far in July suggests pressures are more structural and likely will remain for some time.''
The difference, or spread, between the dollar London interbank offered rate and the overnight index swap rate on contracts trading in the forwards market reached all-time highs this week, according to data tracked by Lehman Brothers Holdings Inc. The spread is an indirect measure of the availability of funds in the money market and of banks' willingness to lend. Forwards signal what traders expect in the future.
Investors weren't reassured after Treasury Secretary Henry Paulson's announced plans this week to help rescue Fannie Mae and Freddie Mac, the largest U.S. mortgage lenders. Investors are also wary bank failures may spread after the collapse of IndyMac Bancorp Inc. earlier this month.
``Forward Libor-OIS spreads are at historical highs and even spot levels are approaching mid-March levels, as funding pressures remain elevated,'' said Priya Misra, an interest-rate strategist at New York-based Lehman. There is ``nervousness heading into banks' earning season.''
The three-month Libor-OIS spread traded forward to December 15, when the December Eurodollar futures contract expires, is 75.5 basis points, according to Tullett Prebon Plc. Eurodollar futures are priced at expiration to three-month dollar Libor. The spot three-month dollar Libor-OIS spread is 76 basis points today, up from about 70 basis points at the end of last month. The spot spread peaked last year at 106 basis points in December.
U.S. Stocks Slide
U.S. stocks have dropped this week amid concern that bank writedowns will increase, with shares of Citigroup Inc. plunging yesterday to the lowest level since the company was created through a merger in October 1998. Fannie Mae and Freddie Mac, known as government-sponsored enterprises, or GSEs, have each lost more than half their market capitalization in the past week.
The world's biggest financial services companies have posted more than $417 billion of losses and writedowns tied to the mortgage-market collapse, according to Bloomberg data
``It's a classic case of words not being enough, and that the markets need more concrete action,'' said Moorad Choudhry, an economics professor at London Metropolitan University and author of `Bank Asset and Liability Management.' ``There are more writedowns expected and speculation of the possibly of other financial firms going bust.''
Risks of Slowdown
Overnight indexed swaps rates signal what traders' predict the Federal Reserve's daily effective federal funds rate will average over the time period.
Fed Chairman Ben S. Bernanke, in testimony to the Senate Banking Committee yesterday, said that risks of an economic slowdown and higher inflation are increasing.
``Libor-OIS spreads are widening, in part, due to expectations of more and longer-term bank recapitalization needs,'' said Stan Jonas, who trades interest-rate derivatives at Axiom Management Partners LLC in New York. ``The end of the year will be brutal. There are also fears that the impact of the GSE's problems may cause the Fed to overshoot on rates to the downside, which lowers overnight index swap rates relative to Libor.''
Futures contracts traded on the Chicago Board of Trade show a 93 percent probability that the Federal Reserve will keep its target rate for overnight loans unchanged at 2 percent at the Aug. 5 meeting. That is up from 23 percent a month ago, when the remainder of bets had been for an increase. Traders see a 50 percent chance policy makers will keep borrowing costs steady in December, up from zero odds a month ago and 24.9 percent a week ago.
Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events, such as changes in the weather.
``Libor-OIS has remained stubbornly wide as balance sheet pressures remain and investment banks continue to de-lever,'' wrote Terry Belton, global head of fixed income and foreign exchange strategy in New York at JPMorgan, a unit of the third- largest U.S. bank by assets, in a note on July 11. ``While we had expected some relief after quarter end, the modest widening so far in July suggests pressures are more structural and likely will remain for some time.''