Concerns about governments' fund-raising to meet various stimulus commitments weighed on debt markets, causing yield curves to steepen in the United States, Australia and elsewhere even as short-term rates remained firm.
U.S. dollar funding costs remained high in Asia on Thursday, extending strains which revealed concerns ranging from how a proposed U.S. "bad bank" would affect large banks as well as signs the Federal Reserve was cutting back its cash injections.
U.S. dollar funding markets in Singapore were quoting 3-month dollars at 1.24667 percent, up from 1.244 percent on Wednesday, after a steady rise from 1.09 percent in mid-January. Eurodollar futures were pricing in 3-month LIBOR at 1.25 percent by March.
The 3-month OIS spread, the spread between interbank rates and overnight-indexed swaps, also widened to 99 basis points and pointed to expectations of widening spreads between interbank and policy rates.
The spread between 10- and 2-year yields in U.S. Treasuries has widened to 195 basis points from 123 at the end of December.
"The Fed's balance sheet has been shrinking ever since December," said Amy Auster, head of currency and international economics research at ANZ, adding the rise in LIBOR and dollar spreads seemed to be consistent with that "significant shrinkage".
"Everybody was focused on U.S. fiscal stimulus and its impact on the treasury curve but it's hard to find an economy anywhere that isn't experiencing the same thing to one degree or another," Auster said.
The Federal Reserve on Tuesday said it was extending up to October swap lines it had with 13 central banks, through which it provides dollars. It also extended a host of other programmes providing liquidity to U.S. commercial paper and money markets and large firms.
But those attempts to keep greasing the world's money markets failed to bring down dollar funding costs, whose rise has affected funding markets in Singapore, Thailand, Hong Kong and South Korea.
In Australia, yields rose and the curve steepened after the government said on Wednesday it plans to issue between A$22 billion and A$24 billion in debt between now and the end of June.
"It's quite a lot more than what was expected and, pending further details on where they issue on the curve etc, there is a pretty big implication for term yields here," Auster said.
That news about the debt issuance came after the Reserve Bank of Australia cut its overnight rate by 100 basis points to 3.25 percent on Tuesday at the same time that the government announced a second round of spending worth A$42 billion.
Auster said expectations for the pace for RBA easing had declined and the market was only looking for a 50 basis point cut at the next meeting, wound down from 75 bps earlier.
Aussie overnight-indexed swaps, which reflect expectations of future policy moves, climbed with the 3-month OIS at 2.665 percent compared with 2.49 on Monday.
Aussie bank bill futures dropped to 97.1 from 97.43 on Tuesday, showing market expectations for 90-day bill yields to be near 2.9 percent by March rather than 2.57 earlier in the week.
