The cost of borrowing in dollars between banks fell the most in two months as credit markets thaw amid record low interest rates and rising customer deposits.
The London interbank offered rate, or Libor, for three- month loans slid four basis points to 79 basis points today, the biggest decline since March 19th, according to British Banker’ Association data.
It decreased for the past 34 days, including a drop of 11 basis points last week, the most since January.
“We’re definitely seeing an improvement on the liquidity front and the risk aversion perception is sharply decreasing,” said Mickael Benhaim, who manages about $32 billion as head of global bonds at Pictet & Cie Banquiers in Geneva.
“Non conventional measures from the central banks are working pretty well. Things are normalizing gradually.”
The availability of credit has improved as the Federal Reserve committed $12.8 trillion to stem the longest recession since the 1930s and central banks around the world cut interest rates to near zero.
Libor, used to set borrowing costs on about $360 trillion of financial products globally, according to the BBA, has declined from as high as 4.82 per cent in October, after the collapse of Lehman Brothers Holdings.
The drop in Libor is being fuelled by surging customer deposits as much as increased confidence among banks, Jim Vogel, an analyst at FTN Financial said last week.
The TED spread, the difference between what banks and the US Treasury pay to borrow for three months, narrowed one basis point to 66 basis points, the lowest level since August 2007, when the credit crisis began.
The Libor-OIS spread, another gauge of banks’ reluctance to lend, narrowed five basis points to 58 basis points, the least since March 24th, 2008.
Libor has dropped more than two basis points for the past four days. The last time it fell so much was in the four days through January 13th.
“The rate of decline has increased the last few days and it seems there’s more money around,” said Peter Chatwell, a fixed-income strategist in London at Calyon, the investment- banking unit of Credit Agricole SA.
“Things are progressing nicely. It’s looking positive.”
Bloomberg