Interbank lending suffers as $700 billion rescue vehicle breaks down

Pressure on the interbank lending markets intensified today, after Congress rejected the US government’s bailout plan.

The Ted spread, which tracks the difference between three-month Libor and US Treasury bills, reached an all-time high of 3.536% yesterday, though it decreased  to 3.34% by 11am New York time today.

In a stark illustration of the problems facing the market, the overnight US dollar Libor rate skyrocketed to a record 6.875% at its fixing this morning, from 2.569% yesterday. The overnight sterling Libor rate also increased, reaching 6.780% from 5.262%, a trend echoed by overnight euro borrowing costs, which rose to 4.449% from 3.712% over the same period.

Three-month US dollar Libor climbed to 4.053% today, up from 3.882% yesterday. The cost of borrowing both the euro and the pound for three months reached monthly highs, climbing to 5.274% and 6.3% respectively from 5.222% and 6.261% on September 29.

The US Congress voted against the Treasury department’s $700 billion economic rescue legislation yesterday, causing equity markets to slump. Following the news, the Dow Jones Industrial Average ended the day down 778 points - the largest one-day drop in its 112-year history.

Strain eases on interbank lending
Failure of $700bn bailout sparks equity slump