Money Market Developments
Three month dollar LIBOR has edged up again today. It has risen every day since May 10th, though the pace has slowed. This reflects the demand for dollar funding. While the focus in on European banks, the scramble to secure funding seems more widespread. The fx forward market is one avenue that dollar funding can be secured and contacts report this is widespread, including in some Middle East currency forwards.
Meanwhile, reports suggest that US fund managers are trimming their holdings of commercial paper issued by European banks. Funds also appear to be shortening maturities and letting paper roll-off, which is more passive than outright selling.
BBVA, the second largest Spanish bank that the Wall Street Journal reported was unable to renew a large tranche of dollar commercial paper recently. Today the bank indicated that it could borrow 3-month euros at about 80 bp, which thought to be on the high end of market.
Separately, the Bank of Spain notes that Spanish banks have stepped up their borrowings from the ECB. The borrowings for 3-months and longer rose to 89.4 bln euros last month, the most in at least 18 months.
As mentioned in previous notes, new US regulations that take effect on May 28th, require money market funds to shorten average maturity of their holdings to 60 days from 90 days and keep 30% of the portfolios in cash or securities that can be liquidated within a week. In response to this, companies and other issues of commercial paper are shortening the duration of their borrowings.
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