Ted Spread Narrows...from Bloomberg

By Gavin Finch and Matthew Brown
Jan. 13 (Bloomberg) -- The premium that banks pay to borrow money compared with the U.S. Treasury narrowed to the least in five months, signaling the freeze in credit markets that began 18 months ago is starting to thaw.

The difference between the London interbank offered rate, or Libor, that banks say they charge each other for three-month loans in dollars and the yield on the three-month Treasury bill fell 12 basis points to 98 basis points today. The so-called TED spread last closed below 100 basis points Aug. 15. Dollar Libor dropped to 1.09 percent today, the lowest level since June 2003.

“It’s slowly but surely improving,” said Padhraic Garvey, head of investment-grade debt strategy at ING Groep NV in Amsterdam. “We’re going through a good period now with regards to Libors.”

Central banks around the world sought to combat the seizure in credit markets by cutting interest rates and lending record amounts of cash directly to banks. President-elect Barack Obama said Jan. 12 he wants the second half of a $700 billion financial- bailout fund available to him as “ammunition” in the event of an economic emergency and promised to direct more of the money to small businesses and homeowners.

The falling cost of borrowing for banks is luring some companies back to the credit markets. Bad Homburg, Germany-based Fresenius SE, the owner of the world’s largest kidney dialysis provider, is seeking to become the first sub-investment-grade company to sell bonds for 18 months, people familiar with the matter said yesterday.

‘Crisis Territory’

The three-month dollar Libor is still 84 basis points above the Federal Reserve’s target, compared with an average of 12 basis points in the year before the crisis began. The spread was 332 basis points on Oct. 10, less than a month after the collapse of Lehman Brothers Holdings Inc.

Libors “are still very elevated,” ING’s Garvey said. “In absolute terms, they are still in crisis territory.”

In a further sign that banks remain wary of lending to each other, overnight deposits placed with the European Central Bank by financial institutions held at more than 300 billion euros ($397 billion) for second day yesterday. The daily average in the first eight months of last year was 427 million euros.

The Libor-OIS spread, a measure of money-market stress favored by former Fed Chairman Alan Greenspan, narrowed to 93 basis points today after yesterday dropping below 100 basis points for the first time since the September failure of Lehman.

The Libor-OIS spread, which peaked at 364 basis points on Oct. 10, averaged nine basis points in the year before the credit freeze started. Greenspan said in June that the spread should serve as a measure for determining when markets have returned to normal.
A narrowing to 25 basis points in the Libor-OIS spread would be viewed as a positive, according to Greenspan. Forward markets signal the spread will have narrowed to 32 basis points by September 2010.

Libor, the benchmark for $360 trillion of financial products worldwide is set by a panel of banks in a survey by the British Bankers’ Association typically before noon each day in London.


posted by Peter Greene

http://www.bloomberg.com/apps/news?pid=20601087&sid=awoHiH6w1BDQ&refer=home