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Dollar Libor Falls Below 0.6 Percent for First Time (Update1)
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By Gavin Finch

June 26 (Bloomberg) -- The cost of borrowing in dollars for three months in London dropped below 0.6 percent for the first time as central banks offered cash to financial institutions and signaled interest rates will stay at record lows.

The London interbank offered rate, or Libor, that banks charge for three-month loans fell half a basis point to 0.598 percent today, according to the British Bankers’ Association, taking its decline this year to 83 basis points. The rate, a benchmark for about $360 trillion of financial products around the world, peaked at 4.82 percent on Oct. 10 following the collapse of Lehman Brothers Holdings Inc. on Sept. 15.

The Federal Reserve said June 24 it would keep its target rate for overnight loans, currently between zero to 0.25 percent, at “exceptionally low levels” for an “extended period.” The European Central Bank yesterday lent banks 442 billion euros ($621 billion) for 12 months, the most it has ever allotted in an auction.

“Central banks are still flooding the markets with cash and that’s clearly continuing to ease the strains,” said Christoph Rieger, a fixed-income strategist at Commerzbank AG in Frankfurt. “There is still a distinct lack of liquidity though. Interbank lending volumes are very low.”

The drop in Libor and other measures of financial stress indicates that credit markets are recovering from the seizure that followed the collapse of Lehman. U.S. companies sold a record $751 billion of debt in 2009, 22 percent more than in the same period last year, according to data compiled by Bloomberg, as the global economy showed signs of rebounding from the worst recession since World War II.

Greenspan’s Gauge

The Libor-OIS spread, a barometer of the reluctance of banks to lend, stayed at 38 basis points today, down from a peak of 364 basis points on Oct. 10. The spread, the premium banks charge over what traders predict the Fed’s daily effective federal funds rate will average over the next three months, averaged 26 basis points in the five years before the start of the credit crisis in August 2007.

Contracts traded in the forward market indicate the gauge will drop to 30 basis points by July 2011, within 5 basis points of the level former Federal Reserve Chairman Alan Greenspan said he would consider as “normal.”

Fed officials yesterday acknowledged the economic contraction was slowing, while maintaining the economy may “remain weak for a time.” Gross domestic product shrank at a 5.5 percent annual rate in the first quarter, less than economists estimated last month, revised figures from the Commerce Department showed yesterday in Washington.

OECD Report

The Organization for Economic Cooperation and Development boosted its forecast for the economy of its 30 member nations for the first time in two years this week. A U.S. government report today may show consumer spending rose in May for the first time in three months.

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, before publishing them before noon.

To contact the reporter on this story: Gavin Finch in London at [e-mail]
Last Updated: June 26, 2009 08:06 EDT