Thursday, May 21, 2009


 
   By Keith Jenkins 
   Of DOW JONES NEWSWIRES

LONDON (Dow Jones)--The cost of borrowing longer-term U.S. dollars in the London interbank market continued to fall Thursday, hitting its lowest rate since the British Bankers' Association first introduced Libors back in 1986, while extending a streak of lower fixings to thirty-seven days.

Minutes of the Federal Open Market Committee's April meeting were more pessimistic on the economic outlook for the U.S. as growth projections through 2011 were revised down and unemployment forecasts were revised higher.

Analysts said the FOMC minutes supported the view that interest rates in the U.S. would remain low for some time.

"Brisk falls in Libor fixings, particularly in U.S. dollars, are no longer purely headlines without substance," said Giles Gale, market strategist at Royal Bank of Scotland.

"Interbank unsecured activity is improving noticeably with money changing hands at terms expiring this year increasingly frequently," Gale added.

Data from the BBA showed three-month U.S. dollar Libor, seen as a key gauge of the effectiveness of the Federal Reserve's monetary policy, dropped to 0.66125% from Wednesday's 0.71625%.

The three-month rate peaked at 4.81875% on Oct. 10.

The one-month Libor rate edged higher to 0.30875% from 0.30813%, while the overnight rate fell to 0.2175% from Wednesday's 0.22125%, remaining within the Federal Reserve's Fed funds target range of zero-to 0.25%.

According to current valuations in eurodollar futures contracts, Libor rates are expected to continue to fall.

The June eurodollar contract trades around 99.43, suggesting BBA three-month Libor rate will have dropped to 0.57% by the contract expiry on June 15.

The three-month BOR/OIS spread, a gauge of stress in the money markets, narrowed to 45.5 basis points from 51.6 bps Wednesday.

The spread has tightened significantly from its widest point of 366 bps, seen on Oct. 10 when interbank market tensions peaked.

Lending rates in Europe and the U.K. were mixed Thursday.

An announcement by ratings agency Standard & Poor's, which revised its outlook for the U.K. to "negative" from "stable", had little impact, as the agency affirmed the U.K.'s 'AAA' long-term and 'A-1+' short-term sovereign credit ratings.

The key three-month sterling Libor dropped to a new low of 1.30375% from Wednesday's 1.31875%, while the one-month rate fell to 0.69813% from 0.7075%.

The three-month sterling Libor rate peaked at 6.3075% on Oct. 1.

Meanwhile, the overnight rate remained unchanged at 0.55%, holding above the Bank of England's Bank Rate of 0.50%.

Euro Libor fixings were higher Thursday.

The key three-month rate rose to 1.2525% from Wednesday's 1.24688%, while the one-month rate increased to 0.87875% from 0.84938%.

Meanwhile, the overnight rate climbed to 0.9375% from Wednesday's 0.83625%, moving closer to the ECB's refinancing rate of 1.0%, and continued above the deposit facility rate of 0.25%.

Analysts at BNP Paribas said there could be further near-term upward pressures on rates and BOR/OIS spreads.

"Excess liquidity should remain low in the very near term and keep the overnight rate closer to the refinancing rate," they added. "Things will probably ease by the end of the current reserve maintenance period in early June."

-By Keith Jenkins, Dow Jones Newswires; +44-20-7842-9495; keith.jenkins@dowjones.com

(END) Dow Jones Newswires

21-05-09 1114GMT