Posted by Gilmour Poincaree on November 13, 2008

Posted to the web on: 13 November 2008


SINGAPORE — Market disappointment with the US Treasury’s proposed shift in the use of its bailout funds spilled over into Asian money markets today, freezing spreads and heightening uncertainty across assets.

Currencies and stock markets tumbled in Asia while interbank rates remained fairly elevated over policy rates, even rising slightly in markets such as Hong Kong. Japan’s central bank turned more aggressive in its support for the market, pumping in a heavier than normal amount through repo transactions starting next week.

The uncertainty stemmed as much from the US government’s plan to focus the remainder of its $700 billion bailout fund on making direct investments in financial institutions and shoring up consumer credit markets as from the upcoming meeting of the Group of 20 nations.

Leaders of the 20 industralised and emerging nations meet tomorrow in Washington. “The U-turn by Paulson is spurring fears that banks won’t be able to weather the persistent financial crisis without being able to offload the troubled assets off their books to another party,” said Sue Trinh, a strategist at RBC Capital Markets in Sydney.

“And a policy u-turn in an environment of heightened uncertainty does not help confidence, in that it simply adds to that uncertainty.” The US Treasury Department initially promoted the financial rescue package approved by Congress last month as a vehicle to buy illiquid mortgage assets from banks and other institutions to spur fresh lending.

However, that plan never got off the ground and US Treasury Secretary Henry Paulson told a news conference asset purchases were not the most effective use of the funds. Dollar funding rates were barely changed in Asia, quoting at 0,1 to 0,4% for overnight funds and 2,2-2,7% for three-month funds. Three-month dollar LIBOR fell to 2,1325% overnight

Analysts suspected other risk spreads would also cease narrowing, as they have been for weeks, while markets seek clarity on Treasury’s plans. The US TED spread, the spread between 3-month treasury bills and inter-bank rates, narrowed to 199 basis points yesterday, far below their widest level of 4,6 percentage points in October yet far wider than lows around a 110 basis points in September.

“The downtrend in the TED spread tells us that the panic in the money market is over,” ING economist Tim Condon said in a note. “However, we do not expect a normal TED spread to be restored as long as banks view their counterparties as dependent on government support. The TARP flip-flopping is unhelpful in that regard.”

Three-month Hong Kong inter-bank rates rose 10 basis points to 2,1372%, reversing a steady downtrend in place since late October, as Asian currencies fell and Hong Kong dollar forwards priced that bearishness in. Overnight-indexed swaps continued to drop, reflecting both an abundance of cash and expectations for rate cuts, despite the stickiness in inter-bank rates.

The spread between three-month dollar OIS and LIBOR fell to 163 basis points on Wednesday. In India, the one-month OIS was bid at 6,25%, compared with a 7,5% central bank overnight lending rate and 9,8% one-month interbank rate. Elsewhere, the Bank of Japan undertook aggressive funding operations to start on Monday, the first day of the new monthly reserve maintenance period when a temporary scheme of paying interest on excess reserves at the central bank will take effect.

The BOJ bought 2 trillion yen of JGBs in repo agreement for one day from November 17 to November 18 at 0,43%, and also bought ¥1,6-trillion of JGBs in repos for a week from Nov.17 at 0,46%, a tad lower from 0,48% at similar repo operations earlier in the week.

“The BOJ may be sending a message that it wants to ease repo rates in the new reserve period,” said a money market trader at a big Japanese bank. “The one-day repo operation is unusual and it may just be a technical smoothing operation, but could also be a signal that it will address a gap in supply whenever possible,” he said. The yen overnight call rate was trading around the BOJ’s 0,3% policy target.



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