SYDNEY (Reuters) - Global credit strains took a heavy toll on Australian money markets on Monday, driving interbank rates to their highest in 13 years as banks hoarded cash even as desperate borrowers scrambled for more funds.
The credit stress spilled over from the United States last week where the Federal Reserve was forced to promise billions of extra dollars to ease a logjam in the markets which had seen intense pressure on some hedge funds and mortgage lenders.
"The economic downside has increased quite a bit," said Peter Jolly, head of research at National Australia Bank. "The credit markets seem to be telling us that not all is well in the economy and the financial system."
On Monday, Carlyle Capital Corp CARC.AS, an affiliate of private equity firm Carlyle Group CYL.UL, said it was still in talks with lenders on funding its $21.7 billion bond portfolio.
Last week the bond fund said its banks had made margin calls it could not meet and warned of a cash shortage.
In Australia, the strains were showing in the interbank market where banks were hoarding cash, driving three-month bank bill futures as high as 8.15 percent. That was up from 8 percent on Friday and almost 90 basis points higher than the central bank's overnight cash rate of 7.25 percent.
In Japan, JGB futures vaulted to a 2-1/2-year high, with traders saying hedge funds were getting caught on the jump in London Inter-bank Offered Rate (LIBOR).
Yen LIBOR was set at 0.9875 percent on Friday, jumping back to the highest since mid-December when money markets around the world seized up as banks hoarded cash on their balance sheets before closing books on the year.
The jump in Australian bill rates came even as three-year and 10-year government bonds rallied after investors sought refuge in less riskier sovereign debt, spooked by gloomy U.S. jobs data which stoked fears of a recession in the world's largest economy.
"The fact that government bond yields are falling and the bank bill rates are rising shows the extent of funding pressure existent at the shorter end," said Rory Robertson, interest rate strategist at Macquarie Bank.
"Funding pressures have become intense and the news is getting even worse since it started last August."
TIGHT FINANCIAL CONDITIONS
On Friday, the Federal Reserve unveiled new measures injecting $200 billion into the banking system and said it was in close consultation with counterparts at other central banks.
The Reserve Bank of Australia (RBA) last year injected generous amounts of cash into the banking system, but has been more frugal since. In its daily operation on Monday, it added just about A$150 million ($138.75 million) more than the banking system's requirement of A$1.05 billion.
Last week the RBA raised official rates to a 12-year high to contain domestic inflation.
The central bank has left the door open for more hikes, but noted that past rate hikes coupled with rising borrowing costs from the global credit crunch had led to a substantial tightening in financial conditions.
Commercial banks have responded to the funding pressure by raising their mortgage and corporate lending rates by more than the increase in the official cash rate.
Commonwealth Bank of Australia Ltd (CBA.AX), the country's biggest mortgage lender, said on Monday it would raise its variable home loan rate by 35 basis points -- 10 basis points higher than the central bank's hike.
Some analysts still think there is a real risk the RBA will hike again in May after what is expected to be an alarmingly high inflation report for the first quarter.
But the markets have almost priced out any chance of a further hike, and are even implying around 23 basis points of rate cuts by the RBA in the next 12 months.
"I expect the RBA to keep rates on hold in the foreseeable future as the market is doing some of the tightening that it would have done," said Macquarie's Robertson.
Analysts say the tightening in lending conditions have led to a high premium being attached to liquidity and this was expected to keep term money market rates at elevated levels.
"High money market rates reflect the wider global credit crunch and also some of Australia's reliance on overseas markets for funding," said Besa Deda, senior market strategist at St. George Bank.
"Some companies which used to be able to fund themselves from international markets, are now having to access locally to banks for funding since the onset of the global credit crunch."
(Additional reporting by Eric Burroughs in Tokyo)
(Editing by Jonathan Standing)