* Dollar funding rates fall in Singapore, track LIBOR
* US swap spreads widen again after sharp tightening
* Currency basis swaps stabilise after Fed restarts USD
* S.Korean swap rates fall, BOK seen on hold Wednesday
By Umesh Desai
HONG KONG, May 11 Dollar funding costs eased in
Asia and money markets showed signs of stabilising on Tuesday
on hopes the Federal Reserve's revival of currency swaps with
major central banks would relieve some global strains from the
euro zone debt crisis.
The European Central Bank and Swiss National Bank were
among those launching the newly started swap lines to make
dollars more available after a sell-off in markets last week
prompted some banks to shy away from lending to European
counterparts and pushed up interbank lending rates.
The ECB said on Tuesday it had lent banks $9.2 billion in
an eight-day operation aimed at easing funding tesions, but the
Bank of England and Swiss National Bank said they had received
no bids in similar operations.
The renewed stability came even as investor doubts about
the mammoth $1 trillion rescue package for weaker euro zone
states sparked a drop in the euro and a retreat in stock
markets after a huge relief rally on Monday.
"The actions announced yesterday should largely eliminate
the extreme pressures that were building in funding markets,
and LIBOR can now be expected to stablise and trade a little
lower," said Sean Keane of Triple T Consulting in an note.
Earlier, money markets had made a frantic scramble to
secure dollar funding in what some had felt was a return to the
dark days of the troubled global funding markets in 2007 and
2008 during the subprime mortgage crisis.
Singapore interbank dollar rates fell to 0.430 percent
SIUSD3MD=ABSG on Tuesday from 0.435 percent, which was the
highest since mid-August 2009, tracking a slight dip in
three-month LIBOR USDLIBOR to 0.42125 percent from a
nine-month high of 0.42813 percent on Friday.
Monday's drop in LIBOR helped drag down the spread between
LIBOR and overnight index swaps USDOIS -- one of the main
gauges of financial stress during the crisis -- to 18.6 basis
points from a high of 22 basis points on Friday. That spread
had been as low as 6.6 basis points in March.
Two-year U.S. swap spreads -- another key gauge of
financial stress -- were about 4 basis points wider at 31.5
basis points USD2YTS=TWEB after having shrunk as far as 25
basis points on Monday in the broad market rebound.
A Reuters poll on Monday showed that most primary bond
dealers on Wall Street now expected the Fed to hold off from
raising interest rates until 2011 while it waits to see if
Europe can defuse its sovereign debt problems. [FED/R]
Cross-currency basis spreads showed the market slipping a
bit after Monday's big reduction in the premium for acquiring
The one-year yen-dollar LIBOR basis swap spread
JPYCBS=TTKL showed the discount for yen LIBOR slipping back
to -29 bps from -27, still off the deeper discount of -38 bps
seen last week.
In the euro market, the three-month basis EURCBS=ICAP
slipped back to -48 bps from -40 bps the previous day but up
from a low of -62 bps last week.
In South Korea, won swap rates KRWIRS fell across the
curve on the eve of the central bank's policy rate review, at
which it is expected to keep rates unchanged at a record low of
2 percent for the 15th consecutive month.
One-year swaps fell by 3 bps to 2.86 percent while the
longer dated swaps fell by 5-6 bps flattening the curve.
"Everyone thinks there will be dovish comments from the
governor and that has boosted the futures and the IRS market,"
said a Seoul-based strategist.
But some analysts are worried the rally in the rates market
may have gone too far.
"Given that front-end rates have fallen sharply over the
last few months, we see an upside risk to them should BoK's
statement surprise on the hawkish side. As such, we stick to
our 1s2s flattener going into the policy meeting," said Royal
Bank of Scotland in a note, referring to a trade designed to
benefit from a narrowing in one- and two-year rate
But the one-year cross currency basis spread -- the
difference between implied rates in currency swaps
KRWCRS=KMBC and local interest rate swaps KRWIRS -- widened
to -159 bps from -153 bps although it is much lower than the
January levels of -185 bps.
"There are some who still worry about dollar funding with
all this flight to quality. The dollar-won going up, U.S.
Treasuries rising and equities weakening, so people are
worried. But nothing more than that," said the Seoul-based
(Editing by Eric Burroughs)