Spirits lift as investors warm to banks
Spirits lift as investors warm to banks
By David Oakley
Published: October 16 2008 03:00 | Last updated: October 16 2008 03:00
Investors are lending to banks in significant volumes for the first time since the collapse of Lehman Brothers a month ago in a key sign of a revival in the frozen money markets. The ability of banks to borrow in the commercial paper markets provides them with a major source of funding, which has been virtually closed off because of fears of counterparty risk since Lehman imploded.
Although dealers stressed it was too early to predict a turning point the opening up of the CP markets and broad-based falls in interbank rates, which fell across all maturities in the major currencies from overnight to a year, lifted spirits on the trading floors yesterday.
Meyrick Chapman, fixed income strategist at UBS, said: “The good news is located in the commercial paper markets. There has been a clear shift away from sovereign and supranational issuance because investors are seeking out bank names . . . for the first time in a month.”
British, French, Spanish and Scandinavian banks have been borrowing at one-week to three-month maturities in the European CP market this week, with companies which have also struggled to raise money in the past month increasingly able to issue short-term debt.
Of critical importance is the activity in three month borrowing, which has been the most stressed in the money market arena because of fears over defaults.
London interbank rates yesterday fell at the three-month maturities, with dollar Libor falling 8 basis points to 4.55 per cent, euro Libor falling 5bp to 5.17 per cent and sterling Libor falling 3bp to 6.21 per cent.
The overnight index swap spread, an indicator of credit risk that measures the difference between three month Libor rates and expected official rates, also fell.
However, Libor and OIS spreads are still at highly elevated levels. Libor rates are more than 2 percentage points higher than before the collapse of Lehman.
The euro markets were more active than dollar and sterling, according to traders. Banks are still unsure about issuing in sterling because of the annual fee the government is charging to insure term debt, which could make it costly to raise short-term funds.
Don Smith, economist at interdealer broker Icap, said: “There is more activity. We are seeing an increase in term lending and sentiment has improved, certainly since last Friday when people were quite scared after the collapse in equities. It must be stressed the markets are going to take time to recover.”
Three-month Libor rates for December are also lower than current three-month rates, which suggests tensions will ease at the end of the year, when funding pressures are most acute.
Copyright The Financial Times Limited 2008
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