"Libor Drops by Most in More Than Two Months as Recession Eases
By Lukanyo Mnyanda
May 21 (Bloomberg) -- The cost of borrowing in dollars between banks dropped the most in more than two months, adding to evidence that policy makers are unfreezing credit markets.
The London interbank offered rate, or Libor, for three- month dollar loans decreased six basis points today, the biggest drop since March 19, to 0.66 percent, the British Bankers’ Association said. The rate has more than halved this year. Libor is used to set borrowing costs on about $360 trillion of financial products globally, according to the BBA.
The decline coincides with growing signs the worst of the financial turmoil has passed. Europe’s manufacturing and service industries shrank at the slowest pace in eight months in May, a report showed today. Nobel Prize-winning economist Paul Krugman said in Ho Chi Minh City, Vietnam, that the global “freefall” may have ended, with the U.S. economy on course to expand “slightly” in the second half.
“The decline in Libor does gel with a lot things going on, as general volatility and risk aversion have been reduced,” said Padhraic Garvey, head of investment-grade debt strategy at ING Groep NV in Amsterdam. “The market has a nose for things getting better in due course.”
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 as they sought to ease the flow of credit. Three-month Libor, one of the rates that determines everything from student loans to mortgages, rose to 4.82 percent in October in the wake Lehman Brothers Holdings Inc.’s collapsed a month earlier.
TED, OIS Spreads
The TED spread, the difference between what banks and the U.S. Treasury pay to borrow for three months, narrowed four basis points to 51 basis points today, the least since August 2007, when the credit crisis began. It peaked at 464 basis points on Oct. 10.
The Libor-OIS spread, another gauge of banks’ reluctance to lend that measures the difference in the three-month rate and the overnight indexed swap rate, decreased to 46 basis points, the least since February 2008. It has dropped from as high as 364 basis points in October.
Libor is derived from a survey of banks conducted by the BBA each day in London. Institutions are asked how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies from dollars to euros and yen. The BBA then calculates averages that exclude the four highest and lowest quotes, before publishing them before noon.