Three-mth dlr Libor at 5-wk high, Fed rate cut bets trimmed

LONDON - The interbank cost of borrowing three-month dollars rose by its biggest daily amount since the credit crisis hit last August on Friday as concerns LIBOR quotes may have been understated combined with doubts about further U.S. interest rate cuts.

By (Reuters)

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Published: Fri 18 Apr 2008, 7:28 PM

Last updated: Sun 5 Apr 2015, 11:40 AM

The three-month London interbank offered rate (LIBOR) for dollars rose another nine basis points on Friday to 2.90750 percent from 2.81750 percent, according to daily fixings compiled by the British Bankers Association.

The rate has jumped almost 20 basis points this week alone -- its biggest weekly jump since mid-August -- as concern about the possible understatement of dollar Libor quotes by contributing banks surfaced.

The BBA has announced it is bringing forward a review of how LIBOR rates are set.

But the sharp move in rates also comes as U.S. rate futures FEDWATCH began to readjust to speculation the U.S. Federal Reserve may be close to done with cutting rates, preferring to rely on enhancing liquidity to ease the credit crunch.

“A lot does appear to be rate expectations and that will follow through to LIBOR,” said ICAP economist Don Smith. “But the fact the LIBOR/OIS spread is wider shows it is not all to do with rate expectations.”

The difference between London interbank offered rates and what are seen as “risk free” rates defined in Overnight Index Swaps -- blew out to 93.75 basis points from 87 basis points this time on Thursday. Strategists saw no prospects for the spread to tighten in coming weeks.

“Looking at all the discussion, the polemic regarding the Libor, there’s still a lot of stress in the market. The market is still stuck. We still need central banks to intervene to support the market,” said Nathalie Fillet, senior interest rate strategist at BNP Paribas in London.

Debate has been raging over the credibility of the LIBOR fixings. The BBA said this week it would exclude from the process any banks that distort the market.

Sixteen banks submit rates for the LIBOR fixing. The rate is calculated from the average of the middle eight rates, with the outliers discarded.

The lowest contributed rate on Friday was 2.82 percent from Bank of America, followed by 2.86 percent from Lloyds TSB.

The highest rates were from Barclays and Bank of Scotland at 2.94000 percent, followed by Royal Bank of Canada at 2.925 percent.

But the renewed stress looked focused on dollar quotes.

Three-month sterling LIBOR rates fell as markets anticipated a rescue package for the British mortgage market from the Bank of England and the government.

Overnight LIBOR rates fell across the board.

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