Tuesday, September 11, 2007

Libor hits high on cash rush

By Joanna Chung, Financial Times

Published: September 11 2007 22:35 | Last updated: September 11 2007 22:35

The cost of funds in the hard-hit interbank money markets hit peaks not seen for nearly a decade on Tuesday as the scramble for cash by financial groups showed little sign of easing.

An important borrowing benchmark for investors, the three-month London interbank offered rate (Libor), climbed to 6.90375 per cent in the sterling market, up from 6.89625 on Monday, leaving it 115 basis points above the Bank of England’s base rate of 5.75 per cent and at the highest level seen since November 1998.

The continuing rise of the three-month sterling Libor rate that is used by many financial institutions to fund their portfolios of securities, underlines the high demand from banks to secure liquidity for the next three months coupled with their efforts to hoard cash amid the squeeze in the credit and money markets. The problem could get more pressing given the large volume of asset-backed commercial paper due to expire in coming weeks.

The London money markets are expected to witness a spike in the volume of ABCP that is maturing on September 17, with much of that paper needing to be refinanced on Thursday, since it typically takes two days to settle ABCP notes. If the notes due to expire for the entire month – estimated to be worth a combined $160bn in the sterling, euro and dollar ABCP markets – are not rolled over, this will force the banks to extend liquidity lines to many ABCP borrowers, a prospect that has encouraged banks to hoard liquidity.

The European Central Bank on Tuesday confirmed plans to inject extra funds into the three-month money markets this week. Last week, the Bank of England said it would move to ease the pressure on overnight interest rates by supplying up to £4.4bn worth of additional funding on Thursday if needed. The ECB and the US Federal Reserve have in recent weeks taken repeated steps to ease pressures in the money markets.

The overnight money-market rates on Tuesday remained close to the ECB’s refinancing rate and the Fed Funds rate targets. However, Marc Ostwald, strategist at Insinger de Beaufort, said three-month rates in all three markets were abnormally high.

“Central bank liquidity provision is keeping overnight rates in check, but term money rates are still extremely high due to hoarding of liquidity by large commercial banks to ensure that they can cope with the demand,” he said. “There is a lack of confidence among lenders amid fear of what skeletons there are to come out of the cupboards of those institutions they are lending to.”

No comments: