US financial market concern widens dlr Libor/OIS spreads

LONDON - Interbank money market strains showed little sign of easing on Tuesday as concern over the health of the global financial system, particularly in the United States, intensified.

By (Reuters)

Published: Tue 15 Jul 2008, 7:26 PM

Last updated: Sun 5 Apr 2015, 12:49 PM

The increasingly sour sentiment sent global equities hurtling deeper into bear market territory, with financials among the biggest losers, and the dollar sinking to a record low against the euro.

Nominal London interbank offered rates were little changed from the previous day's fix but the premium paid for borrowing three-month dollar and sterling Libor over anticipated central bank rates over the same period -- or Overnight Index Swap rates -- widened by up to two basis points.

"It feels like deja vu all over again. New problems are coming to light in different corners of the financial system," said Dresdner Kleinwort analysts on Tuesday.

"U.S. authorities are quick to respond, calming nerves by announcing new measures. Risk-appetite then briefly recovers just to give way to more fear as it becomes clear that the authorities also have no magic bullets and the underlying problems cannot be solved by muddling through."

Three-month dollar Libor/OIS spreads widened two basis points to more than 76 basis points, while comparable sterling Libor/OIS spreads widened almost a basis point to 75.5 basis points.

For a table of the British Bankers Association's dollar, sterling and euros Libor fixings on Tuesday, click on [ID:nL15640309].

Fannie, freddie

The widening of dollar spreads comes as investors gave a lukewarm reaction to U.S. authorities' efforts to support embattled U.S. mortgage giants Fannie Mae FNM.N and Freddie Mac FRE.N and prevent a broader financial market meltdown.

On Sunday, the Treasury and Federal Reserve pledged to offer the two government-sponsored entities, which have seen their share prices collapse, increased access to funding, liquidity and a possible equity infusion if needed.

But Fannie and Freddie shares both fell on Monday and in pre-U.S. trade on Tuesday were off another 10 percent or more.

"The markets have given U.S. Treasury Secretary Paulson's plan a mixed reception with the debt of the GSEs faring reasonably well but the equities continuing to be hit," Citigroup strategists wrote in a note to clients on Tuesday.

"Financial stocks come under renewed pressure on concerns of widespread banking failures in the U.S. ... due to their high exposure to deteriorating conditions in commercial real estate and construction lending," they added.

This would make raising additional capital for Freddie and Fannie from the private sector problematic and could increase the need for the injection of public funds into the two companies.

Last Friday saw U.S. federal authorities seize control of California-based mortgage lender IndyMac Bancorp Inc IMB.N after a run on the bank led to the third largest bank failure in U.S. history.

Investors' scepticism over U.S. authorities' ability to navigate the financial system through persistently the choppy waters was reflected in the dollar's broad and deep slide on Tuesday.

The euro traded as high as $1.6038 EUR and the Australian dollar jumped above $0.98 AUD to its highest level in over quarter of a century.

All eyes are now on Paulson and Fed chief Ben Bernanke's testimony on economic and market conditions to Congress at 1400 GMT.

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