Six-month high for Libor cost of dollar borrowing
The cost of borrowing dollars between banks in London rose the most in almost six months amid speculation financial institutions held back funds to meet a tax-payment deadline.
The London interbank offered rate, or Libor, for three-month loans climbed half a basis point to 0.266pc yesterday, the biggest increase since September 29 and the highest level since November 19, according to the British Bankers' Association (BBA).
The Libor is a benchmark for about $360 trillion of financial products around the world.
US corporations faced a March 15 deadline to pay taxes for the 2009 calendar year.
That may be pushing up borrowing costs as traders speculate that rising yields on treasury bills were a sign companies were liquidating short-term holdings to make tax payments, said Aaron Kohli, an interest-rate strategist at RBS Securities in Connecticut, the US.
The rate on the three-month treasury bill rose to 0.165pc, its highest level since August 24.
"Dollar funding is becoming incrementally more difficult to obtain," said David Keeble, head of fixed-income strategy at Credit Agricole Corporate and Investment Bank in London.
"A corporate tax payment this week has effectively drained the money market of funds."
The cost of borrowing is rising even after the Federal Reserve kept its target rate for overnight bank loans at a record low and repeated a pledge to leave it there for an "extended period".
The Fed, which has kept the rate in a range of zero to 0.25pc since December 2008, began using the "extended period" language in March 2009 and repeated it at each meeting since then.Libor is derived from a survey of banks conducted by the BBA each day.
Institutions are asked how much it would cost them to borrow from each other for 15 periods, from overnight to one year, in currencies including dollars, euro and yen.
The BBA then calculates averages, before publishing the so-called fixings by noon.
Bank borrowing costs may have troughed after plunging in the past two years as central banks slashed rates and injected cash into the financial system, according to Matteo Regesta, an interest-rate strategist at BNP Paribas in London.
"There is no way fixings in dollar Libor can go any lower," he said. "If there is any volatility in the fixings, you can expect it to be on the upside."