MONEY MARKETS-Funding spreads tighter, Korea injects dollars

* Dollar funding rates, spreads tighten further

* Australia OIS prices in more than 150 bps rate cut

* South Korea injects dollars, money markets easier

By Vidya Ranganathan

SINGAPORE, Jan 13 (Reuters) - Dollar lending rates and their spreads over official rates narrowed further in Asia on Tuesday even though some of that easing was driven by dismal economic data weighing down the short end of money markets.

Despite spreads coming in significantly over the past few weeks, there were signs suggesting banks continued to hoard cash and had turned far more discerning about the credit quality of their counterparties than before the credit crisis.

The rate on three-month dollar funds in Singapore SIUSDD=ABSG dropped to 1.133 percent from 1.195 percent on Monday, its lowest level since early 2004, yet its spread over the effective fed funds rate was still above a 100 basis points compared with a spread of 5 to 6 bps in the first half of 2007.

The spread between LIBOR and overnight-indexed-swaps (OIS), an indication of how far interbank rates are from actual expectations of where they will be, has tightened to 99 basis points for the 3-month tenor from as high as 365 in October last year. Yet, even that spread remains far above levels of 8-9 basis points in June 2007, just before the subprime crisis imploded.

"It is really just reflecting the fact that the world has changed in terms of bank financing and the risk associated with lending to banks and we're still trying to find out what the right spread should be," said Damien McColough, Westpac Bank's chief interest rate strategist.

The steady flow of weak economic data and tepid credit growth had given markets little time to adjust to a post-crisis scenario or for spreads to settle at what markets deem as appropriate levels, he said.

"The market is settling at a level that makes funding on average well above what it used to be. That just reflects ongoing economic uncertainty," McColough said.

Sean Keane, managing director of Triple T Consulting and a former head of money market trading at Credit Suisse in Singapore, said lenders were now relying on their own estimates of creditworthiness and were unwilling to lend to lower rated borrowers.

"The cash markets have permanently changed and the cost of funding is very much institution dependent, it is not LIBOR," he said in a note to clients.

The interest rate futures market meanwhile has been heatedly bidding up positions betting on a steep fall in LIBOR. March eurodollar futures EDH9 price the 3-month LIBOR at 0.815 percent.

Fund-raising by top-rated corporates meanwhile has picked up steam. U.S. companies sold $23 billion of investment grade bonds last week, the first week to cross the $20 billion mark since May 2008. In Asia, Export-Import Bank of Korea sold a $2 billion dollar bond this week.

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