MONEY MARKETS-Dollar rates decline, spreads at pre-crisis level
* Dollar 3-month rate at lowest since mid-2004
* Dollar lending spreads tightest since August 2007
* Futures market bets on much lower rates by June
SINGAPORE, Jan 9 (Reuters) - Dollar lending rates in Asia extended their decline to their lowest since mid-2004, depressing other spreads and indicating that money markets were rapidly moving back to levels seen before the credit crisis.
Investors were betting on an even steeper fall in interbank rates even as analysts worried that the optimism may wane if the new U.S. Congress does not announce fresh stimulus measures soon after President-elect Barack Obama's inauguration this month.
Rates on three-month dollar funds in Singapore SIUSDD=ABSG dropped to 1.29714 percent from 1.37857 percent on Thursday, hitting their lowest levels since May 2004.
The two-year dollar swap spread USD2YTS=RR SMKR99 -- a gauge of counterparty risk -- was quoted at 55.75 basis points, 7 points narrower than Thursday and more than 100 basis points off their widest in October 2008.
Those spreads are near their tightest levels since August 2007, when effects of the subprime mortgage collapse had barely begun to be felt.
"There's no doubt sentiment-wise overall there seems to be an improvement. Clearly expectations from the new Obama government are helping a lot of that," said Joseph Kraft, head of Japan capital markets at Dresdner Kleinwort.
The improvements in credit markets have been far from uniform. U.S. consumer credit has been contracting but corporates have hit the market with a flurry of bond issues at the start of the new year, some backed by the Federal Deposit Insurance Corp.
Analysts are banking on the Federal Reserve's term liquidity facility for asset-backed securities, to be launched next month, to free up cash for student loans and other smaller businesses.
Until then, the huge amounts of cash supplied by central banks continue to reside in money markets, as excess reserves commercial banks place with their central banks.
The effective fed funds rate has stayed around 0.11 percent since mid-December, when the Fed cut its rates to near zero.
"Given that day to day funding is going to cost around 0.11 percent for the foreseeable future it would seem reasonable to expect the 3-month LIBOR fixing to trade substantially lower," Sean Keane, managing director of Triple T Consulting and a former head of money market trading at Credit Suisse in Singapore.
EXPECTATIONS FOR LOWER RATES
Keane said there was substantial room for front-end yields to fall further, which he felt was the reason why futures speculators were buying call options on the June 2009 eurodollar futures contract EDM9.
The three-month LIBOR was traded at a spread of 1.18 percentage points over the overnight-indexed swap USDOIS, which is also a gauge of expectations of LIBOR.
Even if LIBOR traded at a 50 basis points premium over the OIS, the March eurodollar contract EDH9 would have to be at 99.40 at maturity, Keane reckoned. It was at 99.045 on Friday.
Dresdner Kleinwort's Kraft said while LIBOR and other spreads had come closer to pre-crisis levels, they were far from normal. For instance, LIBOR would have to trade 20-30 basis points above comparable Treasury yields in a normal environment, he said.
The TED spread TEDCASH, or premium investors pay for 3-month LIBOR over comparable Treasury yields, was at 118 basis points, down steadily from 137 on the last day of 2008.
"The risk is that if the expectations are that the stimulus measures are going to be implemented immediately i.e. at the Obama inauguration or within this month, there is room for disappointment," Kraft said. "So we can't be too complacent." (Editing by Tomasz Janowski)
