Short-term borrowing costs for financial institutions have fallen to the lowest since August relative to U.S. Treasury bills in a sign of growing investor confidence that banks will weather Europe’s escalating debt crisis and the slowing economy.
The difference between what U.S. financial institutions and the government pay to borrow for three months has narrowed by almost 50 percent since December to 32 basis points. The gap between the commercial paper and Treasury bill rates has shrunk from a 2 1/2-year high of 58 basis points on Dec. 8. A separate measure of debt-market stress, the two-year interest-rate swap spread, is near an 11-month low.
Bonds of Fairfield, Connecticut-based General Electric Co. are the most actively traded dollar-denominated corporate securities by dealers yesterday, with 45 trades of $1 million or more as of 12:13 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The Fed under Chairman Ben S. Bernanke bought $2.3 trillion of Treasury and mortgage-related debt to stimulate the economy. It decided in June to extend a policy known as Operation Twist, in which it sells short-term securities and uses the proceeds to buy longer-term debt, through December by an additional $267 billion.
“With three month Treasury bills rates so low, unless you are really forced to invest in them, few want to purchase them,” said Jim Lee, head of short-term markets and futures and options strategy in Stamford, Connecticut, at Royal Bank of Scotland Group Plc’s RBS Securities Inc. “There is demand by investors for yield in this lower for longer Fed rate environment.”
Credit-default swaps on 13 European banks such as BNP Paribas SA and UBS AG have diverged from those tied to the six largest U.S. banks, with the gap at 67.3 basis points on July 13. In February, there was no gap in the average price of the contracts.