LONDON/NEW YORK Nov 12 (Reuters) - Short term borrowing rates for banks fell on Wednesday, continuing a month-long thaw in the global credit freeze, while a Federal Reserve auction suggested that banks' demand for short term cash may be satisfied.
Widening euro and sterling spreads raised questions about how much money market conditions were improving though.
London interbank offered rates for three-month euros were fixed lower for the 25th consecutive trading session and comparable U.S. dollar and sterling rates fell for the 23nd straight day.
Libor is the biggest indicative global benchmark for setting short term loans. Some $150 trillion of financial, corporate and household borrowing is referenced to Libor.
But analysts cautioned the falling Libor rates did not reflect additional lending.
"It's still not functioning as a market: people are borrowing less, not lending more and you just can't get away from the fact," said David Keeble, head of rates strategy at Calyon.
Meanwhile, in the U.S. Federal Reserve's Term Auction Facility (TAF) sale on Wednesday, offering banks $150 billion of short term loans, "almost none of the money was taken, a clear sign that the Fed has sated the need for money in the inter-bank market," wrote Tony Crescenzi, chief bond market strategist with Miller, Tabak & Co. in an email note.
Only $12.6 billion of the $150 billion in loans was taken, for a bid-to-cover ratio, a gauge of demand, of just 0.08, "an almost shockingly low number and a positive development for the inter-bank funding market, in particular Libor," Crescenzi added.
That was the lowest ever bid-to-cover ratio since the Fed started the TAF program in December 2007 as a reaction to the unfolding credit squeeze, as one way for the U.S. central bank to inject funds into cash-strapped financial institutions.
There are several such facilities now in place, while banks and dealers have also borrowed record amounts of direct funds from the Fed via the so-called discount window.
Market participants continued to report hardly any interbank lending for periods beyond a month, in large part due to concerns over the year-end period when financial institutions take a snapshot of their books for reporting purposes and liquidity dries up.
The head of rates trading at one bank said the improvement in funding conditions for banks and corporates could start to show more marked improvement after the New Year. But only "some names" are currently able to go to the market with any success and until the end of the year, things will remain relatively "bleak and horrible." Please login or register to see the full article
