Pressure eases on interbank lending

Strain on the interbank lending markets is easing as large infusions of liquidity start to take effect and market confidence improves.

The Ted spread, which tracks the difference between three-month Libor and US Treasury bills, dropped today to 2.31% after hitting an all-time high of 3.12% on September 18.

Three-month US dollar Libor also declined, falling to 3.198% today from a peak of 3.21% on Friday. Conversely, the cost of borrowing both euro and sterling for three months reached monthly highs today, climbing to 5.025% and 6.01%, respectively.

Since peaking at 6.438% on September 16, the overnight US dollar Libor rate has continued its downward trend, reaching 2.969% today, its lowest point since September 12. The overnight sterling Libor rate sunk to 4.706%, the lowest figure recorded so far this month, while overnight borrowing costs for euro were at 4.406%, down from a high of 4.498% on September 15.

On September 18, six major central banks announced a co-ordinated initiative to improve short-term US dollar liquidity. The Federal Open Market Committee authorised a $180 billion expansion of swap lines with the European Central Bank (ECB), the Bank of England (BOE), the Bank of Canada, the Bank of Japan (BOJ) and the Swiss National Bank. The announcement followed huge increases in liquidity lines earlier in the week, including $51.8 billion from the BOJ, $142.1 billion from the ECB, $70 billion from the US Federal Reserve and $44.6 billion from the BOE.

Interbank lending still under pressure