Credit Observer: Stress? What Stress? LIBOR Rates Lower
By William Sokolis
CHICAGO (MNI) - Money market stresses softened at the start of the new week, LIBOR lower, basis levels and front end swap spreads tighter ahead of a potential funding squeeze event later in the week.
Early last week, Barclays Capital strategist Joseph Abate alerted money markets to a potential funding issue for Eurozone banks that could push LIBOR higher in short order as the European Central Bank's first and largest (E442 billion) one-year refinancing operation -- the Long Term Refinancing operation (LTRO) -- expires this Thursday, July 1.
Abate said the expiration "could cause some funding pressure on dollar LIBOR." The relative calm for money markets may also be disrupted as "EU leaders plan to publish bank stress test results in July, which could raise anxiety about all bank credit."
Abate estimates 3M LIBOR could "potentially" move "toward 75bp before settling close to 60 bp or so."
Kicking off the current week, U.S. dollar LIBOR set mostly lower Monday morning (1W to 2M steady); LIBOR/OIS and forward FRA/OIS basis levels narrowed; effective funds rate held at 0.16%.
The 3M rate set 0.125 bps lower at 0.53344% after drifting -0.035 bps lower on net last week, the 1M rate steady at 0.34719% (-0.015 bps last wk).
Out the curve, 6M rate set 0.6 bps lower to 0.74719%, while the 12M rate dipped 0.75 bps to 1.17563%.
On basis levels, 3M premium paid over anticipated central bank rates (Overnight Index Swap) had 3M at 33.54 vs. 33.69 early Friday, 1M at 16.11; forward 3M IMM FRA/OIS spreads had Sep'10 at 43.99 vs. 48.23, Dec'10 at 51.34 vs. 55.0, Mar'11 at 45.00 vs. 48.75.
Abate posited the "ECB will not replace the 1y tender with another unlimited offering of 1y money, rather it will offer an (unlimited) 3m operation instead," with attention "focused on how much of the E442 billion stays at the ECB and how much leaves the program."
Several shops weighed in on the LTRO expiration, saying anxiety over a LIBOR blow-out on increased Eurozone bank funding pressures was overdone, reminding the expiration is in Euro currency and adding that domestic banks are well insulated.
Others said the ECB is likely to take new action in order to limit the reduction in excess liquidity.
In the current session Abate pointed to a "recent back up in EONIA rates (the analogue to the Fed funds rate)," suggested that Eurozone "banks are ramping up their precautionary balances in anticipation of more expensive unsecured funding costs this summer."
Meanwhile, swap spreads held to mixed levels and a tight range in the current session, with the tighter front-end ascribed to "relief trade" and bounce in front-end rates markets after the 3M LIBOR set lower.
Still, desks looked to put on wideners with corp supply slowing into quarter and weary of potential for a LTRO expiry-tied funding squeeze.
Stay tuned.
WEEK-OVER-WEEK LVLS June 1 Jun 7 Jun 14 Jun 21 Jun 28 overnight US$ LIBOR 0.30338% 0.30088% 0.29775% 0.29813% 0.29313% 1-Wk US$ LIBOR 0.33125% 0.32938% 0.32938% 0.32750% 0.32875% 1M US$ LIBOR 0.35088% 0.35000% 0.34969% 0.34719% 0.34719% 3M US$ LIBOR 0.53625% 0.53719% 0.53706% 0.53838% 0.53344% 3M LIBOR/OIS Spd 31.47 31.61 N/A 32.83 33.54 3M Jun10 FRA/OIS 36.16 33.74 N/A N/A N/A 3M Sep10 FRA/OIS 59.59 50.47 45.79 42.31 43.99 3M Dec10 FRA/OIS 58.97 57.00 49.50 48.50 51.34 2Y Swap Spreads 46.25 57.00 38.00 33.25 36.75
MONTH-OVER-MONTH Jan 19 Feb 16 Mar 15 Apr 19 May 19 overnight US$ LIBOR 0.17188% 0.17125% 0.19281% 0.24900% 0.29875 1-Wk US$ LIBOR 0.20750% 0.20875% 0.21125% 0.25213% 0.32025 1M US$ LIBOR 0.23063% 0.22875% 0.23031% 0.25750% 0.34106 3M US$ LIBOR 0.24900% 0.25000% 0.25763% 0.30531% 0.47750 3M LIBOR/OIS Spd 10.70 9.9 5.86 8.63 24.95 2Y Swap Spreads 27.75 30.0 20.50 15.0 36.00
For comparative purposes, all-time highs/wides for U.S. dollar LIBOR, basis was set on October 10, 2008 compared to start of 2009:
Oct 10'08 Jan 2'09 Jan 4'10 overnight US$ LIBOR 2.46875% 0.12375% 0.17375% 1-Wk US$ LIBOR 4.56750% 0.31375% 0.20813% 1M US$ LIBOR 4.58750% 0.43000% 0.23344% 3M US$ LIBOR 4.81875% 1.09875% 0.25438% 3M LIBOR/OIS spd 366.98 98.07 9.33 3M Mar FRA/OIS 105.00 97.33 10.70 3M Jun FRA/OIS 75.00 88.93 16.52 2Y Swap Spreads 149.25 70.25 29.50
** Market News International Chicago Bureau: (708) 784-1849 **
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