Money-Market Rates Climb to All-Time Highs as Freeze Deepens

Money-Market Rates Climb to All-Time Highs as Freeze Deepens

By Andrew MacAskill and Lukanyo Mnyanda

Oct. 7 (Bloomberg) -- Money-market rates climbed to records as U.K. lenders held talks with the government on emergency funding and Iceland took steps to bolster its banks amid an unprecedented credit squeeze.

The euro interbank offered rate, or Euribor, that banks charge each other for three-month loans rose 3 basis points to 5.38 percent today, the eighth straight all-time high, the European Banking Federation said. The Tokyo interbank rate stayed at the highest level this year and the Libor-OIS spread, a gauge of cash scarcity among banks, widened to a record.

``There's still a massive lack of confidence in this market and the more we talk about it, the more it becomes a self- fulfilling prophecy,'' said Jan Misch, a money-market trader in Stuttgart, Germany, at Landesbank Baden-Wuerttemberg. ``Sentiment hasn't improved much and rates remain at elevated levels.''

The seizure in global credit markets is deepening on speculation central bank attempts to revive lending between financial institutions won't work, resulting in more bank failures. The U.K. government may invest $79 billion in some of the nation's banks to bolster their capital, two people familiar with the matter said. Iceland's Financial Supervisory Authority said it took control of Landsbanki Islands hf, the country's second-largest lender.

The Libor-OIS spread, the difference between the three- month dollar rate and the overnight indexed swap rate, climbed 3 basis points to 292 basis points today. The average was 8 basis points in the 12 months to July 31, 2007, before the credit squeeze began.

Australian Rate Cut

Japan and Australia's central banks pumped more than $11 billion into markets today in an attempt to revive lending. The Reserve Bank of Australia also slashed its benchmark interest rate by a whole percentage point, twice as much as economists forecast, raising speculation policy makers around the world may act together to cut borrowing costs.

``We've seen a bit of a reprieve on the back of speculation the Federal Reserve could announce new measures and that we could see coordinated rate cuts,'' said Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt.

The TED spread, or the difference between what banks and the Treasury pay to borrow money for three months, was at 383 basis points today, from 382 percentage points yesterday. It was at a record 391 basis points earlier.

Financial institutions have incurred $585 billion in writedowns and losses since the collapse of the U.S. subprime- mortgage market in early 2007. Governments in Europe and the U.S. arranged rescues for six financial institutions in the past two weeks.

The Tokyo three-month interbank rate held at 0.87 percent, the highest since last year, and the corresponding rate in Singapore rose 1 basis point to 4.24 percent, near the highest since January. Taiwan's overnight lending rate increased 8 basis points to 2.11 percent.

To contact the reporters on this story: Andrew MacAskill in London at amacaskill@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

Last Updated: October 7, 2008 05:19 EDT

http://www.bloomberg.com/apps/news?pid=20670001&refer=govt_bonds&sid=aTL01FeOaMvs