Money market rates continue to fall

Money market rates continue to fall
By David Oakley, Capital Markets Correspondent
Copyright The Financial Times Limited 2009
Published: April 28 2009 15:14 | Last updated: April 28 2009 17:05
http://www.ft.com/cms/s/0/af0243c8-33fc-11de-9eea-00144feabdc0.html


Money market rates have fallen sharply since the start of April, amid increasing signs that banks are starting to lend to each other.

Three-month sterling interbank rates fell for a 44th consecutive day on Tuesday, while US dollar rates fell for the 22nd day in a row and euro rates dropped for a fifth successive day.

The sharp improvement in confidence comes as part of a broader rebound in the market place as risk appetite makes a tentative return, with equities up around 20 per cent since their lows of early March.

London interbank offered rates (Libor) rates have been helped lower by the Bank of England and European Central Bank cutting base rates to historic lows in the past two months.

The fall is important as Libor rates are used as a reference to price billions of dollars of mortgages, loans and corporate bonds.

Significantly, the three-month euro and dollar Libor spreads over market overnight interest rates – considered a pure measure of credit risk – have fallen to their lowest levels since Lehman Brothers collapsed in September.

Don Smith, economist at inter-dealer broker Icap, said: “Conditions are improving with some signs of confidence coming back to the market.

“As Libor rates have ground steadily lower, more banks have shown a willingness to lend, particularly the European banks.

“The increase in activity has been since the start of the month after a very grim late February and March, when things looked pretty dire,” he said

John Ewan, director at the British Bankers’ Association, which sets Libor rates by calculating the average cost of funding from leading banks, said: “The continued easing of the rates demonstrates that liquidity is returning to the wholesale markets.”

However, Mr Smith cautioned against becoming too optimistic.

“We have to remember, we are still nowhere near back to the strength of activity we saw before the credit crisis. It is still a desert for unsecured lending beyond three months.”

Meyrick Chapman, fixed income strategist at UBS, added: ”Falling Libor rates are a good thing as they are used as a reference rate for loans and other products, but I don’t think it tells us much about the cost of funds for banks beyond three months.”

As there is so little lending beyond three months, Libor rates for six months and one-year are considered “meaningless” by some bankers.

One strategist said: “There is no point looking at Libor rates further out as there is hardly any activity. It means the banks just make up Libor rates at six months or a year.”

Sterling Libor for three-month money fixed at 1.465 per cent on Tuesday, at 1.039 per cent for the dollar and 1.378 per cent for the euro. On April 1 the respective figures were 1.625 per cent, 1.176 per cent and 1.498 per cent

The BBA sets rates for sterling, dollar and the euro by calculating an average rate from daily quotes passed on to them by 16 leading banks.