Rates rise as money-market gloom spreads
Money-market rates climbed worldwide as banks hoarded cash on speculation the seizure in credit markets is deepening and may prompt more financial institutions to collapse.
The London interbank offered rate, or Libor, that banks charge each other for overnight dollar loans rose 37 basis points to 2.37pc yesterday, the British Bankers' Association said.
The three-month rate stayed near the highest level since January. Asian rates increased and the Libor-OIS spread, a gauge of cash scarcity among banks, held near a record.
"The situation remains very tight and we probably need more action from central banks,'' said Cyril Beuzit, head of interest-rate strategy in London at BNP Paribas SA.
"There's a strong will from governments to get on top of the situation, but for the moment it hasn't worked. We're still left in a risk- averse environment.''
Interbank rates have jumped as banks store cash to meet anticipated funding needs after governments in Europe and the US acted to prevent the collapse of six financial institutions in the past two weeks. The Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, rose to 298 basis points yesterday, before retreating to 291 basis points. It was at 129 basis points two weeks ago and 81 basis points a month ago.
The Federal Reserve will double its auctions of cash to banks to as much as $900bn and is considering further steps, the central bank said yesterday in a statement. The Fed will increase its auctions under the 28-day and 84-day Term Auction Facility (TAF) operations to $150bn each. The two forward TAF auctions in November will be increased to $150 billion each. The central bank will also begin paying interest on bank reserves.
Yields on overnight US commercial paper jumped 0.94 percentage point to 3.68pc, according to data compiled by Bloomberg that date back to January 1996. That's the highest since September 30, the day after the US House of Representatives rejected an earlier version of the bank-rescue plan. Companies sell commercial paper, which matures in nine months or less, to help pay for day-to-day expenses such as payroll and rent.
The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened yesterday to 393 basis points, the most since Bloomberg began compiling the data in 1984. (Bloomberg)
