MONEY MARKETS-Bank rates fall amid property market turmoil
* Interbank rates fall despite property market worries
* Dollar, euro 3-month Libor/OIS narrows, stg/OIS widens
* Euro 3-month euribor approaches 18-month low
* ECB overnight deposits up to 183 bln euros from 157 bln
* For up-to-the-minute news, click on FINEWS (Adds fresh quotes; changes byline, dateline, previous LONDON)
NEW YORK, Nov 19 (Reuters) - Interbank lending costs fell broadly on Wednesday, even as problems in the commercial real estate market revived worries about credit conditions and bank balance sheets.
Analysts generally agree credit strains have eased from the peak of the crisis in early October, stemming from the demise of Lehman Brothers, but they also quick to point out that market conditions are far from normal.
"Money market conditions have improved but they are far from healthy," said Michael Materasso, co-chair of the fixed-income policy committee at Franklin Templeton in New York. "It's going to a slow process. There are a multitude of problems going on in the financial system."
One of those trouble spots, which has been latent until this week, is the commercial property sector.
The spreads or risk premiums on commercial mortgage-backed securities (CMBS) have ballooned to record wides on concerns that a deep recession will batter values of office buildings and shopping malls.
In contrast to the turmoil in the CMBS market, the amount banks charge each other to borrow three-month dollars, euros and sterling fell on Wednesday in London, according to the British Bankers' Association.
The three-month dollar Libor declined to 2.17250 percent from 2.21750 percent at the fixing on Tuesday. For details, see[ID:nLJ569912]
The spread of three-month Libor over Overnight Indexed Swap (OIS) rates for dollars and euros narrowed marginally to 172 and 167 basis points, respectively, but the sterling equivalent edged one basis point wider to 219 basis points.
The spread expresses the three-month premium paid over OIS or expected central bank rates and is seen as a gauge of banks' willingness to lend to each other. A wider spread is seen as an indication of decreased inclination to lend.
REAL ESTATE RUMBLINGS
The sell-off in commercial mortgage bonds has accelerated this week on growing fears of a rapid deterioration in commercial real estate. A worsening in this market will likely lead to more write-downs for banks and renewed stress in the credit markets, analysts said.
On Tuesday, Credit Suisse issued a report warning two of the biggest loans in recent CMBS, worth a combined $334 million, appear near default. [ID:nN18265722]
"The widening in CMBS tells you there'll be more write-downs and more system stress, and that's bringing bids to Treasuries," said Carl Lantz, U.S. interest rate strategist at Credit Suisse in New York.
Demand for long-dated, safe-haven assets like Treasuries and dollar interest rate swaps pushed two-year Treasury yields US2YT=RR to fresh five-year lows and 10-year swap spreads to record lows.
EURO BANKS RETICENT
Euribor euro interbank lending rates extended their recent decline on Wednesday, with the key three-month rate dropping to a near 18-month low. However, the stubbornly high level of overnight deposits at the European Central Bank underscored the reluctance among banks to lend to each other.
The three-month Euribor EURIBOR3MD=, traditionally seen as the main gauge of the bank-to-bank euro lending market, fell to 4.120 percent from 4.153 percent, its lowest since May 30, 2007.
Overnight deposits at the ECB rose on Tuesday to 183.039 million euros from 157.81 billion euros. Although well below last month's record high of 297.42 billion euros, some analysts read it as a further sign that liquidity was struggling to get back into the money markets. [ID:nFAT004481]
"Banks are fearful of losing capital protection, so they seem more willing to deposit at the ECB at a 2.75 percent return than try a higher rate of return with another bank," said David Schnautz, a bond analyst at Commerzbank in Frankfurt.
He said that although the overnight euro Libor rate dropped to 2.93375 percent at the Wednesday fixing in London from 2.97625 percent, "it might have fallen further had the deposits not been so great."
In Asia, the SIBOR SIUSDD=ABSG fell to 2.2057 percent on Wednesday from 2.2333 percent -- staying wide enough from overnight rates of 0.2 percent-0.5 percent to indicate high levels of counterparty distrust. (Additional reporting by Vidya Ranganathan in Singapore and George Matlock in London; editing by Gary Crosse)
