Strain eases on interbank lending

After a turbulent week, pressure on the interbank lending markets eased today as further injections of liquidity were announced and talks on the US financial rescue package resumed.

The Ted spread, which tracks the difference between three-month Libor and US Treasury bills, dropped today to 2.92% after reaching 3.02% on September 24 and 25.

Three-month US dollar Libor also declined, falling to 3.762% today, from a peak of 3.769% yesterday. Conversely, the cost of borrowing euro for three months reached a monthly high, climbing to 5.139% from 5.111% on September 25.

Since peaking at 6.438% on September 16, the overnight US dollar Libor rate has continued its downward trend, reaching 2.313% today. The overnight sterling Libor rate sunk to 5% after reaching a weekly high of 5.081% on September 25, while overnight euro borrowing costs dropped from 4.38% to 4.069% over the same period.

The US Federal Reserve announced this morning that it has authorised a $13 billion expansion in swap lines with the European Central Bank and the Swiss National Bank. The increases follow $277 billion of additional liquidity lines previously arranged with other central banks.

Hopes also revived for the launch of a $700 billion rescue fund to acquire stressed mortgage assets from stricken financial institutions. The US Treasury’s proposal, first announced on September 19, has faltered in recent days with its passage through Congress dogged by disagreement and uncertainty. However, in a statement delivered today, President Bush maintained that “Republicans and Democrats will come together and pass a substantial rescue plan".

Markets dip as bailout drags on
Pressure eases on interbank lending

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