MONEY MARKETS-USD funding costs drop as Fed swap lines revived

* Fed, other c.banks reopen swap lines to ease market strains

* June Eurodollar futures jump 13 bps, LIBOR fix seen down

* US 2-year swap spreads shrink 9 bps

* BOJ fund injections undersubscribed, yen markets calm

By Satomi Noguchi

TOKYO, May 10 (Reuters) - Front-month Eurodollar futures jumped on Monday and U.S. swap spreads shrank sharply after the Federal Reserve revived dollar swap facilities with major central banks to contain a worsening dollar shortage, stoking expectations for lower dollar LIBOR rates.

The Fed reopened currency swap lines established during the 2007-2008 financial crisis as part of a coordinated response to keep Greece's debt crisis from spreading to the rest of Europe and further roiling financial markets.

The move followed news that the European Union and IMF had agreed on a $1 trillion safety net for the euro zone. [ID:nSGE6490HH]

Money markets started to suffer last week from a renwed scramble to secure dollar funding in what traders said was an eerie repeat of the troubles that dogged global funding markets from the start of the subprime mortgage crisis.

June Eurodollar futures were up 13 basis points on the day at 99.475 EDM0, implying a three-month dollar LIBOR rate of 0.525 percent compared with 0.428 percent USDLIBOR on Friday.

Three-month LIBOR soared about 15 basis points last week to a nine-month peak, yanking the spread between LIBOR and overnight index swaps USDOIS to 21 basis points -- the widest in nine months. The spread of euro LIBOR EURLIBOR over OIS EUROIS also spiked.

"Actions taken by those policymakers are very aggressive and bold enough to feed some stability in the global markets, but it is still premature to say anything concrete about the eventual impact from those measures," said a senior prop trader at an European investment bank in Tokyo.

"The nervousness of the market is not as servere as what it was like at the time just after the Lehman collapse, but any abrupt or unexpected move is still possible, making the market cautious."

Singapore interbank dollar rates were dragged higher by the rise in LIBOR on Friday, edging up 2.5 basis points to is at 0.43500 percent today and compared with Friday's LIBOR three-month rate of 0.428 percent when it posted the largest one-day rise in 16 months.

In a further sign of improvement, the U.S. two-year swap spread -- one of the best gauges of financial system stress during the crisis -- shrank about 9 basis points to 26.5 basis points USD2YTS=TWEB after spiking as high as 45 bps last week, the highest since August last year.

Other key gauges of dollar funding in Asia also recovered a bit.

The South Korean one-year cross currency basis spread -- the difference between implied rates in currency swaps KRWCRS=KMBC and local interest rate swaps KRWIRS -- was -148.5 basis points from -160 bps.

When South Korean banks were caught in a severe dollar funding squeeze in 2008 and early 2009, that spread plunged to near -550 basis points.

The Bank of Japan joined other major central banks in the dollar FX swaps and offered the same-day funds in a special operation for a second consecutive day, the first such action in 19 months.

While the BOJ took steps to reassure the yen money market, interbank trading showed few signs of trouble.

The BOJ earlier offered 2 trillion yen ($22 billion) in same-day funds but attracted only 694.5 billion yen in bids, showing funds remain ample in the banking system. Friday's special operation also drew a similarly lukewarm reception.

Three-month TIBOR ZTIBOR interbank lending rates held steady at a four-year low of 0.394 percent.

In another sign of improvement in dollar funding conditions in the Tokyo market, the LIBOR basis swap spread JPYCBS=TTKL popped back to -28 basis points from -39 basis points on Friday, showing a dip in the discount for swapping yen LIBOR and receiving dollar LIBOR.

(Editing by Eric Burroughs)