Tuesday, Aug 25, 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 dropped further Tuesday as term funding pressures eased, with the three-month rate marking its lowest level since the advent of British Bankers' Association Libor fixings back in 1986.

Data from the BBA showed three-month dollar Libor, seen as a key gauge of the effectiveness of the Federal Reserve's monetary policy, fell to 0.38% from Monday's 0.38688%.

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

Meanwhile, the overnight rate edged lower to 0.22813% from Monday's 0.22875%, holding below the upper end of the Federal Reserve's Fed funds target range of zero-to-0.25%.

Three-month Libor rates are expected to remain at low levels, according to valuations in eurodollar futures contracts.

The September eurodollar contract traded around 99.615, suggesting the BBA three-month Libor rate will fix at 0.385% on the contract expiry date, Sept. 15.

The three-month BOR/OIS spread, a gauge of stress in the money markets, narrowed to 19.2 basis points from 20.1 bps Monday, marking the first time the spread has fallen below 20.0 bps since the collapse of Lehman Brothers in September 2008.

The spread has tightened significantly from its widest point of 366.0 bps, seen on Oct. 10 when interbank market tensions peaked.

Sterling interbank lending rates extended their recent decline Monday, with the key three-month sterling Libor dropping to a new record low of 0.70% from Monday's 0.71%.

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

Meanwhile, the overnight rate slipped to 0.51375% from 0.5175%, but remained above the Bank of England's Bank Rate of 0.5%.

The key three-month euro Libor rate fell to a new record low of 0.81063% from Monday's 0.8175%, while the overnight rate edged down to 0.2675% from 0.27%, below the ECB's refinancing rate of 1.0%, but holding just above the deposit facility rate of 0.25%.

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

(END) Dow Jones Newswires

25-08-09 1100GMT