NEW YORK (Reuters) – A high-temperature gauge of bank funding costs is at levels not seen since the 2008 financial crisis. But rather than signaling stress among major lenders, it is showing the biggest demand for cash the world has ever seen, industry sources said.
The gauge, known as the Libor-OIS Spread, is an imperfect measure of extra interest big banks pay for longer-term financing than the cost of overnight funds.
The spread for three-month debt on Friday was an astounding 1.38 percentage points, twice as high as anytime in the last 10 years. During the 2008 crisis, it climbed above 3.5 percentage points.
Big spreads have historically suggested that banks were having trouble borrowing. But this time, market experts say, it is an indication of unprecedented demand for cash as companies and individuals try to stay afloat while the coronavirus pandemic chokes off income.
“The real economy is looking to raise cash,” said Josh Younger, a fixed-income market strategist at JPMorgan Chase & Co (N:JPM). “When you have a rush for funding, it percolates through to this spread. It does not reflect a bank funding crisis like we saw in 2008.”
Corporations are drawing down credit lines and trying to borrow more cash from banks to make up for shortfalls at a time when huge economies are all but shut down to prevent coronavirus from spreading. They have also been taking back cash that was parked in money-market funds that, in turn, lend to banks.
Credit concerns about banks and the loans they made may surface at some point during this crisis, but that has not happened yet, said a longtime Wall Street executive with expertise in funding markets, who was not authorized to speak publicly. For now, the need for cash is more than enough to explain the spread, he said.
Major public corporations have announced new loans and draws on credit lines of $208 billion during the coronavirus panic through Thursday, according to research by JPMorgan analyst Vivek Juneja. That figure had nearly doubled since Sunday, and does not reflect borrowing from smaller companies, or those that do not need to file disclosures.
Institutional money market funds which corporations use to hold cash have suffered redemptions in the last month of $102 billion, or 31% of their assets, according to JPMorgan.
New Federal Reserve programs to support money-market funds and commercial paper borrowing, which lasts for a few weeks, should help satisfy the corporate cash demand, according to a report by Barclays (LON:BARC) fixed-income analyst Joseph Abate.
That would take some pressure off dollar funding costs generally.
Still, the Fed programs are just getting started and may have to be tweaked before the Libor-OIS levels come back down, Abate noted.
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