US bank rates ease on hopes for more Fed, ECB aid
Sunday, 14 December 2008
NEW YORK, Dec 13 (Reuters): Key bank lending rates slipped Friday as investors looked forward to further help from the world's top central banks, including another expected interest rate cut from the Federal Reserve when it meets next week.
Investors think the Fed will cut rates by an additional half percentage point at a two-day meeting next week, bringing the federal funds rate to a meager 0.5 per cent.
Some are even betting on a bigger rate cut, although concerns about money market funds may prevent the Fed -- the US central bank -- from going all the way to zero.
"We think cutting 100 basis points actually makes a fair amount of sense at this point," said Michael Feroli, economist at JP Morgan. "That said, such a move may be too much for some on the committee to stomach and we think a 50 basis-point cut is the most likely outcome."
There are 100 basis points in a percentage point.
With the prospect of lower official rates running high, London interbank offered rates, known as Libor, drifted lower. Three-month dollar funds dropped below 2.0 per cent. The spread of three-month Libor rates over the Overnight Index Swap rates also narrowed.
The trend was also helped by speculation that at next Thursday's end-of-month meeting of the European Central Bank (ECB) -- typically a housekeeping initiative where interest rate changes are not determined -- the euro zone's central bank could usher in fresh measures to breathe life into weary money markets.
"The new measures could involve the ECB in a Commercial Paper initiative, such as we see from the US Federal Reserve, or further down the road the ECB buying bonds," said Peter Schaffrik, a bond strategist at Dresdner in London.
The Fed's own adventures in short-term corporate lending have achieved mixed success. On the one hand, firms are getting access to capital: US commercial paper issuance rose $48.6 billion over the last week to $1.7 trillion.
The problem is that the Fed's initiative has yet to kick-start any private lending, raising fears that credit markets may be getting addicted to central bank help. Weaning investors off this habit of easy cash could be difficult once the crisis subsides, analysts fear.
Meanwhile, liabilities on the Fed's balance sheet have swollen to over $2.2 trillion, raising concerns about the long-term value of the dollar.
Still, there was a general consensus that, in a crisis of this unprecedented magnitude, every effort at combating it was worth a try.
This includes interest rate cuts, which have come much more slowly in Europe than in the United States. Such a discrepancy might soon narrow, however, with talk brewing in the markets that the ECB might continue to push borrowing costs lower.
"Rate cut expectations are gaining more traction in recent days," said David Schnautz, a bond analyst at Commerzbank in Frankfurt.
In part due to this expectation, the three-month Euribor rate , traditionally seen as the main gauge of the bank-to-bank euro lending market, hit a new two-year low as it fell to 3.282 per cent from 3.329 per cent, the lowest since September 2006.
In the United States, the federal funds rate continues to trade well below the target level, very close to zero. This could be the reason the Fed is reportedly mulling issuing short-dated debt of its own. Such a shift would help it drain some of the excess liquidity that is causing the gyrations in fed funds from the system, economists say.
Investors think the Fed will cut rates by an additional half percentage point at a two-day meeting next week, bringing the federal funds rate to a meager 0.5 per cent.
Some are even betting on a bigger rate cut, although concerns about money market funds may prevent the Fed -- the US central bank -- from going all the way to zero.
"We think cutting 100 basis points actually makes a fair amount of sense at this point," said Michael Feroli, economist at JP Morgan. "That said, such a move may be too much for some on the committee to stomach and we think a 50 basis-point cut is the most likely outcome."
There are 100 basis points in a percentage point.
With the prospect of lower official rates running high, London interbank offered rates, known as Libor, drifted lower. Three-month dollar funds dropped below 2.0 per cent. The spread of three-month Libor rates over the Overnight Index Swap rates also narrowed.
The trend was also helped by speculation that at next Thursday's end-of-month meeting of the European Central Bank (ECB) -- typically a housekeeping initiative where interest rate changes are not determined -- the euro zone's central bank could usher in fresh measures to breathe life into weary money markets.
"The new measures could involve the ECB in a Commercial Paper initiative, such as we see from the US Federal Reserve, or further down the road the ECB buying bonds," said Peter Schaffrik, a bond strategist at Dresdner in London.
The Fed's own adventures in short-term corporate lending have achieved mixed success. On the one hand, firms are getting access to capital: US commercial paper issuance rose $48.6 billion over the last week to $1.7 trillion.
The problem is that the Fed's initiative has yet to kick-start any private lending, raising fears that credit markets may be getting addicted to central bank help. Weaning investors off this habit of easy cash could be difficult once the crisis subsides, analysts fear.
Meanwhile, liabilities on the Fed's balance sheet have swollen to over $2.2 trillion, raising concerns about the long-term value of the dollar.
Still, there was a general consensus that, in a crisis of this unprecedented magnitude, every effort at combating it was worth a try.
This includes interest rate cuts, which have come much more slowly in Europe than in the United States. Such a discrepancy might soon narrow, however, with talk brewing in the markets that the ECB might continue to push borrowing costs lower.
"Rate cut expectations are gaining more traction in recent days," said David Schnautz, a bond analyst at Commerzbank in Frankfurt.
In part due to this expectation, the three-month Euribor rate , traditionally seen as the main gauge of the bank-to-bank euro lending market, hit a new two-year low as it fell to 3.282 per cent from 3.329 per cent, the lowest since September 2006.
In the United States, the federal funds rate continues to trade well below the target level, very close to zero. This could be the reason the Fed is reportedly mulling issuing short-dated debt of its own. Such a shift would help it drain some of the excess liquidity that is causing the gyrations in fed funds from the system, economists say.