Short-term interbank dollar rates ease

Short-term interbank dollar rates eased on Friday in response to governments' aggressive steps to unclog money markets, but longer-term funding remained scarce as market participants awaited further details of these plans.
The cost of borrowing dollars for a day held close to or below the Federal Reserve's 1.5 percent target early in London, and one-week rates were even briefly indicated as low as 0.5 percent earlier in the global session, Reuters charts showed.
In a sign the huge injections of dollar liquidity into the global banking system in recent weeks may be having the desired effect, both the Swiss National Bank and Bank of England auctions of overnight dollars on Friday were undersubscribed.
The SNB's allotment of $1.2 billion was well below the maximum $10 billion on offer and the lowest in a month.
But central banks and governments have gained less traction in term money market funding — covering longer periods — even though these longer-term rates have also fallen this week.
The BoE on Friday said it will conduct a series of one- and three-month dollar auctions starting next week to try and kickstart interbank lending of periods longer than a couple of weeks.
Banks are pressing ahead with the process of reducing their balance sheets, while market participants await details of how the various government guarantees will affect individual banks.
"More gradually, the guarantee of bank debt and infusion of capital should help relieve stress. But the differential guarantee fee structure will cause various banks to estimate a different unsecured borrowing rate," Barclays Capital's U.S. strategists said in a weekly research note.
And it's a similar story with Europe's interbank market.
"We're seeing bits and pieces (of short-term lending activity) but there's a long way to go," said one trader.
"There's a lot of risk aversion out there even though we have a lot of guarantees in Europe. We want to see details of these plans. We've had the headlines but we need the nitty gritty details, what it covers, who it covers."
BALANCE SHEET WATCH
In London on Friday interbank rates for overnight dollar deposits were indicated in a range of between 0.5 and 1.5 percent, compared with 1-2.5 pct on Thursday.
Three-month dollar deposit rates early on Friday were indicated in a slightly narrower range of 4.25-4.8 percent compared with 4.2-5.1 percent early in London on Thursday. They were briefly indicated as low as 2.7 percent overnight in Asia.
All dollar, euro and sterling London interbank offered rates (Libor), with the exception of overnights euros, were fixed lower on Thursday for the third consecutive day. Friday's fix will be between 6 a.m. and 7 a.m. EDT.
Three-month sterling interbank rates were last indicated around 5.2-6.2 percent versus 5.4-6.2 percent early Thursday, and euro three-month rates in a narrower range of 4.9-5.04 percent compared with 4.75-5.25 percent.
There is typically a premium on deposit rates over Libor fixings because Libor is taken from a smaller sample of large banks in the market.
Deposit and Libor rates are only indicative prices of where banks are lending to each other, not necessarily the levels at which lending is actually being carried out.
"Very few trades are occurring in the term markets because the offered side of the market has vaporized as banks are reluctant to tie up balance sheet/capital," Bank of America said in a weekly strategy note.
Analysts said while major banks had obtained access to the massive amounts of cash central banks are pumping into the markets, smaller players, hedge funds and institutions were still selling out of most markets to trim counterparty risks and meet margin calls.
Banks' general reluctance to lend to other institutions was reflected in the latest European Central Bank figures that showed euro zone banks deposited almost 205 billion euros in overnight funds at the ECB on Thursday.
That was the second highest on record, following the previous day's 211 billion euros (282 billion dollars).