MONEY MARKETS-Credit risk distorts liquid markets
* Japan repo rates persistently high despite ample cash
* India swaps below policy rate, commercial paper expensive
* HKMA injects funds to cap currency, HIBOR dips
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SINGAPORE, Nov 12 (Reuters) - An abundance of cash and lingering distrust of bank and business lending persisted in money markets in Japan, India and elsewhere in Asia on Wednesday, causing distortions in money market spreads.
Plunging Indian overnight-indexed swap rates revealed excess cash in the money markets, with 3-month OIS INROIS quoted 1.5 percentage points below the central bank's lending rate of 7.5 percent.
Yet banks were raising one-year funds this week at 10.8 percent, even while one-year OIS was quoted at 6 percent. A business raised one-month commercial paper at 11.25 percent on Tuesday.
Overnight rates in Japan were anchored to the Bank of Japan's 0.3 percent policy target but lending between securities dealers in the Japanese bond repo market remained sticky, with rates around 0.5 percent.
"Given concerns about liquidity, players are reluctant to lend, particularly to securities firms which are the major fund raisers in the repo market," said a senior trader at an European bank in Tokyo.
"Also, there is little incentive to lend for business, given the very narrow spread between the overnight call rate and the repo rate."
Dollar funding rates remained in unyielding steady ranges, showing that after weeks of softening aided by the massive injections of cash by central banks, the downtrend in rates had hit resistance.
In any case, overnight dollar rates have been between 0.1 and 0.5 percent in Singapore and Hong Kong for several days, far below the Federal Reserve's 1 percent target. Three-month dollar rates also hugged a steady 2.2-2.7 percent range.
Three-month Singapore dollar rates SISGD3MD=ABSG hit 0.8875 percent, their lowest in four years.
The U.S. TED spread, the spread between 3-month treasury bills and inter-bank rates, is now just below 200 basis points, far below their widest level of 4.6 percentage points in October yet far wider than lows around a 110 basis points in September.
For credit spreads to tighten, analysts said, there would have to be clear signs of a bottoming in U.S. housing prices, which would then provide clarity on how widely and deeply the mortgage crisis had hurt businesses and banks.
HIBOR FALLS
Analysts at Royal Bank of Scotland said negative funding premium in India, the difference between the OIS and policy rate, reflected the huge overhang of liquidity in money markets which in turn could be either due to the heavy quantitative policy easing or high expectations for rate cuts.
But funding premiums were high and positive in Hong Kong and Singapore, RBS said, probably showing funding stresses are spread quite deeply to the longer tenors of the money market curve in these markets.
"It would probably take another six months before funding premiums are fully corrected, which means that money market curves are only going to properly reflect market expectations for central bank policy moves after first-quarter 2009," RBS wrote to clients.
In Hong Kong, interbank rates fell further as the central bank pumped funds to cap the currency HKD=, which has been trading at the top of its 7.75-7.85 band to the U.S. dollar. Three-month HIBOR hit 2.04 percent, its lowest since June.
The Hong Kong Monetary Authority intervened three times on Tuesday, injecting HK$5.8 billion ($750 million) to keep the currency within its pegged trading band. (Additional reporting by Chikako Mogi in Tokyo; Editing by Jan Dahinten)
