US Libor rate trickles into funding markets

INDICATOR SURGE MAY HAVE A MOSTLY TECHNICAL EXPLANATION

From Riyadh to Sydney, short-term funding markets worldwide are starting to feel the effects of soaring US dollar Libor rates.

The surge in recent weeks in this key global short-term financing indicator may have a mostly technical explanation, meaning it’s probably not flashing warning signals like it was during the credit crunch or the European sovereign debt crisis. Nonetheless, it’s still making funding more costly for some borrowers outside the US.

The three-month London interbank funding rate rose to 2.25 per cent Tuesday, the highest since 2008. The concern is that the Libor blowout may have more room to run, a prospect that borrowers and policymakers in various markets are just beginning to grapple with.

“There has been sort of the perfect storm of factors tightening financial conditions,” said Russ Certo, head of rates at Brean Capital in New York. “Banks do have tremendous liquidity still, but it’s at a higher price.”

The Libor increase is due in part to the deluge of Treasury bill issuance since the US debt ceiling was raised in February, which has helped drive bill rates to the highest since 2008. The US tax overhaul is also coming into play, by spurring expectations that companies will park cash in commercial paper as part of repatriating money. And of course there’s the fact that the Federal Reserve is tightening policy.

Global phenomenon

Whatever the explanation, the phenomenon is becoming a global one. Here’s how rising US dollar funding costs are flowing through to other regions:

Libor’s rise is complicating Saudi Arabia’s efforts to stem the risk of capital flight as the Fed is poised to continue raising rates.

In February, Saudi Arabia’s interbank offered rate, Saibor, fell below US Libor for the first time since 2009. The kingdom’s monetary authority raised rates last week ahead of an anticipated US hike, the first time the kingdom has changed the repo rate in almost a decade. The move lifted the key Saudi interbank rate closer to the Libor rate, making it less attractive for depositors to shift into dollars.

Since October 2008, Saibor has been about 60 basis points above Libor on average. On March 16, it was 19 basis points below, the most in a decade, an indication of ample liquidity in the domestic banking system.

Rising Libor is also fuelling uncertainty surrounding Hong Kong’s peg to the US dollar.

The benchmark is 116 basis points above Hong Kong’s interbank offered rate, or Hibor, the widest gap since 2008. The increase has pushed the local currency to the weak end of its band versus the dollar, spurring speculation the Hong Kong Monetary Authority will step in.

Indeed, a majority of analysts surveyed by Bloomberg said they expected the monetary authority to act.