Dollar Libor Falls to Record Low as Cash Glut Weighs on Rates
(Bloomberg) -- An abundance of cash in the market for U.S. dollar short-term borrowing pushed one of the world’s major interest-rate benchmarks to a record low on Friday.
The three-month London interbank offered rate for dollars was set at 0.20188%, below the previous nadir of 0.20488% reached on Nov. 20. The benchmark has fallen in all but one of the past nine trading days, weighed down as rates on Treasury bills and repurchase agreements have been pressed lower amid a glut of cash in short-term markets.
The amount of money in search of a short-term home looks set to grow as the Treasury Department draws down its mammoth cash balance in the coming months, with stimulus spending and rules related to the debt ceiling likely to see it shrink by hundreds of billions of dollars.
“That liquidity abundance, and certainly the risk of more with a $1.6 trillion Treasury General Account balance set to decline in coming months, is weighing across front-end secured and unsecured rates,” said Credit Suisse strategist Jonathan Cohn.
The flood of cash on Tuesday pushed the rate on overnight repurchase agreements -- loans collateralized with Treasuries -- as low as 0% before stabilizing around 0.08%, according to Curvature Securities, while ICAP pricing indicated that at one point there were offers below zero.
The cash balance was amassed via a steep increase in Treasury bill issuance last year, intended to fund more pandemic relief spending than ultimately materialized. Drawing it down will mean issuing fewer bills this year, and the prospect of scarcity is weighing on short-term interest rates in general. And the rules surrounding the federal debt ceiling mean that, barring a Congressional agreement, the Treasury’s cash balance of around $1.61 trillion will need to fall over the next several months to around $118 billion, where it stood when the last debt ceiling suspension took place.
“The bills paydown will create a vacuum which probably gets filled with lower yielding CPs going forward,” said Rishi Mishra, an analyst at Futures First, referring to commercial paper. “This process gets accelerated once bills trade below 0% because any yield on a bank CP above 0 is a great grab then.”
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Libor rates for dollars and other currencies, though in the process of being retired in favor of benchmarks with more robust underlying transaction data, retain a high profile. Three-month dollar Libor is the settlement rate for eurodollar futures, one of the world’s biggest financial products.
Mishra said the three-month benchmark could slip to around 10 or 11 basis points by June, a view backed up by eurodollar futures activity. On Thursday, some 59,660 March 2021 eurodollar futures contracts were purchased at 99.83, a price that suggests the three-month dollar Libor benchmark should drop to 0.17% in less than two months.
However, there’s a risk to the view in the event that Federal Reserve policy makers decide to increase the interest on excess reserves rate, or IOER, to help alleviate pressure on short-term rates including its effective fed funds rate. The fed funds rate had hovered at 0.09% for much of the time since late November, but dropped to 0.08% last week and edged lower again on Thursday to 0.07%, although it’s still well within the target range of zero to 0.25%.
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