By Garfield Reynolds and Patricia Lui
Dec. 16 (Bloomberg) -- Asian money-market rates may extend declines on speculation banks will revive lending as policy makers lower borrowing costs worldwide and the U.S. rolls out $8.5 trillion of bailouts and spending plans.
The difference between the rate Australian banks charge each other for three-month loans and the overnight swap rate, a gauge of cash scarcity, dropped 17 basis points to 74 basis points as of 2:19 p.m. in Sydney. The London interbank offered rate, or Libor, that banks say they charge each other for three- month U.S. dollar loans, slid five basis points to 1.87 percent yesterday, the lowest level since September 2004.
“Rates have continued to come off thanks to central bank liquidity injections and aggressive rate cuts,” said Ho Woei Chen, an economist at United Overseas Bank Ltd. in Singapore. “I expect liquidity to remain stable going into year-end but next year there is a possibility rates could spike up in the first quarter as there remains much stress in credit markets.”
Borrowing costs in U.S. dollars fell yesterday on speculation the Federal Reserve will cut interest rates at a meeting today to revive an economy punctured by the collapse in lending. Money markets, which froze after Lehman Brothers Holdings Inc. collapsed Sept. 15, remain dislocated with banks paying more to borrow than before the credit crunch started in August 2007.
Default Swaps
The cost of protecting Asia-Pacific bonds from default rose on concern corporate earnings will fall due to the global recession and that the alleged fraud by investment manager Bernard Madoff will trigger forced selling by hedge funds.
Hong Kong’s interbank offered rate, or Hibor, for three- month loans declined two basis points to 1.5 percent, the lowest level since February 2005, at the 11:15 a.m. local time fixing. Singapore’s three-month rate for U.S. funds dropped five basis points yesterday to 1.90 percent.
The rate Australian banks charge each other for three-month loans declined for a second day, slipping eight basis points to 4.43 percent.
The Reserve Bank of Australia pumped A$949 million ($635 million) into the financial system today after estimating the shortfall would be A$891 million. Banks increased deposits at the RBA by A$128 million yesterday to A$3.67 billion, the central bank said today on its Web site.
Traders reduced bets the RBA will cut rates in February by the most in more than 18 years after policy makers lowered their inflation forecast, according to minutes of their most recent meeting released today.
‘Expansionary’
The Australian central bank’s one percentage point rate cut this month puts monetary policy at an “expansionary setting” to stoke business and consumer confidence, the RBA board said today in the minutes of its Dec. 2 meeting.
There’s a 15 percent chance the RBA will lower rates by 1.25 percentage points in February, down from 41 percent odds yesterday, according to a Credit Suisse index based on overnight interest-rate swaps.
Australian money rates jumped to the highest in almost two months on Dec. 12 as sales of government-backed bonds failed to bring down funding costs. Lenders including Commonwealth Bank of Australia sold more than A$13 billion of government-backed debt in the past week.
The yield on fixed-rate debt sold by Commonwealth, part of the first domestic offering of debt under the guarantee, was priced at a spread of 217 basis points over the equivalent Australian sovereign bond. The spread between the bank’s A$750 million of three-year bonds maturing in June 2011, which aren’t backed by the federal government, and benchmark sovereigns stood at 199 basis points.
Writedowns
Governments and central banks are seeking to spur growth as more than $990 billion of losses and writedowns tied to mortgage-related securities worldwide plunged the global economy into its worst slump since the Great Depression.
The Libor-OIS spread, a gauge of cash scarcity, narrowed six basis points yesterday to 156 basis points. Libor is still 87 basis points higher than the Fed target, up from an average of 16 basis points in the seven years to August 2007, when the credit freeze began. The TED spread, the difference between what the U.S. government and banks pay to borrow for three months, declined five basis points yesterday to 186 basis points, the lowest level since Nov. 11.
“Money markets have shown considerable improvement across the board this week,” Citigroup Inc. said yesterday in a report. “Ample central bank liquidity infusions could see a repeat of last year’s year-end funding pressures being avoided.”
The Markit iTraxx Australia index rose 10 basis points to 402 as of 11:51 a.m. in Sydney, Citigroup Inc. data show. The Markit iTraxx Japan index was 5 basis points higher at 335 in Tokyo, according to Barclays Capital.
Credit-default swap indexes are benchmarks for protecting bonds against default and traders use them to speculate on changes in credit quality. The swaps pay the buyer face value in exchange for the underlying securities if a borrower fails to adhere to its debt agreements. A basis point, or 0.01 percentage point, is worth $1,000 on a swap protecting $10 million of debt.
To contact the reporters on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net; Patricia Lui in Singapore at plui4@bloomberg.net.
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