Dollar funding costs eased slightly in Asia on Monday but other swap and lending spreads remained wide enough to reveal market anxiety about economic and counterparty risks.
The softer Singapore fixing for dollar lending rates belied broad risk aversion in markets where the worries about the U.S. government taking up big stakes in banks, as it plans to do with Citigroup (C.N: Quote, Profile, Research, Stock Buzz), pushed Asian stocks to multi-month lows and sustained buying of safe-haven dollars.
Eurodollar futures EDH9 also rose a bit as dollar lending rates eased, but bill futures in Australia and New Zealand fell and indicated growing expectation the Reserve Bank of Australia may keep rates unchanged when it reviews policy on Tuesday.
In Singapore, 3-month dollars were quoted at 1.25563 percent, softer than 1.26272 on Friday but still far wider than the 3-month overnight-indexed swap USDOIS at 0.25 percent. Friday's 3-month fixing in Singapore was the highest since early January, and was followed by a LIBOR fixing at 1-½ month highs in Europe.
The TED spread TEDCASH, a risk measure of the spread between interbank rates and Treasury yields, was higher at around 101 basis points (bps).
"Things have actually deteriorated over the last two weeks," said Jens Lauschke, a regional strategist with DBS Bank.
Falling stock markets, tumbling currencies and growing scepticism over a broad economic recovery in the later half of the year had turned investors even more wary of taking on risk, he said.
"Developments on the emerging markets front are discouraging and in a sense we have a new wave of risk aversion, which generally means upward pressure on rates," Lauschke said.
Those fears took the broad U.S. Standard & Poor's 500 Index .SPX to its lowest close since December 1996. The Korean won hit an 11-year low in Asia on Monday as Asian stock markets also tumbled.
LIBOR and other broad dollar lending measures had stabilised since January, after a period when heavy cash injections by central banks had brought spreads back from their crisis-level wide ranges. Spreads have been widening once again over the past week.
The spread between dollar 3-month interbank rates and corresponding overnight indexed swaps USDOIS has once again gone above 100 bps, levels seen in early January.
"You are beginning to see increased concerns about the health of the financial system not only in the U.S. but also in Europe. You are going to see ongoing risk aversion as a result," said Khoon Goh, senior markets economist at ANZ National Bank in Wellington.
AUSSIE FUTURES DOWN
Australian bill futures <0#YBA:> meanwhile fell after central bank watcher Terry McCrann wrote in the Australian newspaper that the Reserve Bank of Australia (RBA) would hold rates at 3.25 percent at Tuesday's board meeting.
Investors had been pricing in an easing near 50 basis points, but were now back to around 25 basis points <0#YIB:>. A Reuters poll last week [ID:nSYD453334] had a median forecast for a cut in the cash rate to 3 percent from 3.25.
"The case for a pause this week starts with the fact that the RBA has just moved more aggressively than ever before, with five cash-rate cuts in five meetings, from 7.25 percent to 3.25 percent," said Rory Robertson, interest rate strategist at Macquarie.
"Slowing the easing process will help to ensure that policy is properly calibrated to Australia's economic prospects, not to the bleaker economic situations in the US, the UK, the Euro-zone and Japan."
Those changing expectations in Australia caused futures in New Zealand <0#NBB:> to correspondingly fall, even though market participants still believe further rate cuts are needed to prop up New Zealand's faltering economy.
June futures fell to 97.19 from 97.26 on Friday, pricing in 3-month rates at 2.81 percent. The cash rate is at 3.5 percent.
"The news flow from New Zealand economy continues to be quite bearish and we continue to expect rates to be lower still," said Goh.
"But just for today, it's a case of a bit of payside pressures coming largely on the back of the repricing of RBA."
