Asian Money Market Rates Decline on Cash Injections, Fed Plan

By David Yong and Garfield Reynolds

Oct. 29 (Bloomberg) -- Money-market rates fell in Asia as cash injections by central banks and the prospect of central bank interest rate cuts in the U.S. and Japan started to revive confidence in credit markets.

Hong Kong's three-month interbank offered rate, or Hibor, declined 30 basis points, the most in a week, to 3.54 percent, according to the Hong Kong Association of Banks. The similar rate for U.S. dollar loans in Singapore, or Sibor, dropped 5 basis points to 3.43 percent, the lowest since Sept. 24.

``There was some evidence last night that the credit squeeze is easing,'' Adam Carr, senior economist at ICAP Australia Ltd., a unit of the world's biggest interbank broker, wrote today in a research note. ``Saying it's being done in baby steps doesn't accurately characterize the pace.''

Credit markets are thawing after the Federal Reserve bought commercial papers from companies including General Electric, spurring a record surge in sales of corporate IOUs. The Fed also set up a $15 billion swap line for the U.S. currency in New Zealand, adding to pledges of trillions of dollars from central banks and governments worldwide seeking to revive lending.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars, dropped 4 basis points to 3.47 percent yesterday, its 12th straight decline, according to the British Bankers' Association. A basis point is 0.01 percentage point.

Fed, BOJ Rate Cuts

Credit markets, which began seizing up after BNP Paribas SA halted withdrawals on three funds in August 2007, froze as Lehman Brothers Holdings Inc. collapsed on Sept. 15.

The difference between what banks and the government pay to borrow money for three months in Hong Kong narrowed to 334 basis points, versus 358 yesterday and 155 at the start of the year. The equivalent spread in South Korea held at 104, versus 61 at the start of the year.

``Sentiment has improved given easing in Libor and measures taken by the central banks,'' said Ong Hock Ann, a money-market trader at ING Private Bank Ltd. in Singapore. ``Rates are still not back to normal levels as there's still concern that people would rather keep cash for themselves than blow their balance sheets again as year end approaches.''

Futures on the Chicago Board of Trade show a 46 percent chance the Fed will trim its target for overnight bank loans to 0.75 percent from 1.5 percent today. The odds increased from 34 percent a day before. The rest of the bets are for a half-point reduction.

The chances that Japan will halve its overnight rate to 0.25 percent on Oct. 31 rose to 62 percent from 8 percent yesterday, according to calculations by JPMorgan Chase & Co., after the Nikkei newspaper said the Bank of Japan is leaning towards that decision.

Swap Lines

The Federal Reserve is buying commercial paper and has arranged more than $600 billion in international swap lines to meet demand for the U.S. currency, including a $15 billion line with the Reserve Bank of New Zealand today ``to address ongoing, elevated pressures in U.S. dollar short-term funding markets,'' the Fed said in a statement in Washington.

The Fed removed limits on four of the swap lines earlier this month, including ones with the European Central Bank and the Bank of Japan. It also authorized a $10 billion swap line last month with Australia's central bank, then tripled it to $30 billion.

Australian Costs

The Reserve Bank of Australia added A$1.74 billion ($1.1 billion) into money markets today, as financing costs advanced to a two-week high for the country's banks. Australian banks increased deposits at the central bank by A$1.2 billion yesterday to A$7.55 billion, according to the RBA's Web site. Those holdings reached a record A$11.2 billion on Oct. 20.

The rate Australia's banks charge each other for three- month loans rose 4.5 basis points, or 0.045 percentage point, to 5.87 percent as of 10:08 a.m. in Sydney. The difference between that yield and the overnight indexed swap rate, a measure of funding availability, increased 1.5 basis points to 88 points.

The three-month Libor for dollars remains 197 basis points above the Federal Reserve's target rate for overnight loans of 1.5 percent, up from 80 basis points three months ago.

The Libor-OIS spread narrowed to 262 basis points yesterday from 345 basis points two weeks ago. It was 87 points before Lehman filed for bankruptcy protection.

Libor, the benchmark for $360 trillion of financial products worldwide, is set by a panel of banks in a daily survey by the British Bankers' Association by noon in London. Members provide estimates on how much it would cost to borrow in 10 currencies for terms ranging from one day to a year.

To contact the reporter on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net.