Dollar lending rates extended their gradual decline in Asia on Wednesday, with narrowing spreads and a steady rise in debt issuance by businesses suggesting credit strains will improve as economies do.
Some dollar lending spreads still remained well above levels seen before the credit crisis, levels seen in early 2007, implying banks were still suspicious of lower rung credits.
While the Federal Reserve has cut policy rates to nearly zero, money market curves in Asia were still steepening in anticipation of rate cuts and after South Korea's central bank injected dollars this week into a market whose needs still had not been sated by interbank supplies.
The rate on three-month dollar funds in Singapore dropped to 1.0971 percent from 1.133 percent on Tuesday, its lowest level since early 2004. Yet its spread over the effective fed funds rate was still above a 100 basis points compared with a spread of 5 to 6 bps in the first half of 2007.
The spread between LIBOR and overnight-indexed-swaps (OIS), an indication of how far interbank rates are from actual expectations of where they will be, tightened to 94 basis points for the 3-month tenor from as high as 365 in October last year. Yet, even that spread remains far above levels of 8-9 basis points in June 2007, just before the subprime crisis imploded.
"LIBOR goes to 50 basis points by the middle of the year," said Tim Condon, ING Bank's chief economist for Asia.
March and June eurodollar futures EDH9 EDM9 still however price the 3-month LIBOR at 0.86 percent, and analysts expect markets would resist factoring in a lower LIBOR until the economic data turns sufficiently to lessen the endemic distrust banks have of lending.
So far that has not been the case. Coming on the back of a huge joblessness number, Tuesday's data revealed the U.S. trade deficit saw its largest decline in 12 years in November, showing how weak imports and consumer demand were.
Barring a surprisingly strong industrial output number in India and an upward blip in China's purchasing managers' index in December, the data in Asia too has been gloomy.
"As those sort of signs multiply, there is going to be a big scramble out of the risk aversion trade and we are going to get some real good steepening trades globally. But that ain't the story right now," Condon said.
