Japan and Australia's central banks pumped more than $11 billion into the financial system seeking to ease money-market rates that were close to record highs as banks hoard cash on concern about a global recession.
The Bank of Japan injected 1 trillion yen ($9.8 billion) and the Reserve Bank of Australia added A$1.815 billion ($1.3 billion). The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans stayed near a nine-month high. The Japanese Libor-OIS spread, a gauge of cash scarcity among banks, rose to a record.
``There's a massive asset bubble deflating and it just encompasses everything,'' said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., part of the world's largest inter-bank broker. ``We've been living in a dreamland and that dream has ended.''
Interbank rates have jumped as banks store cash to bolster balance sheets as share and commodity prices plunge after governments in Europe and the U.S. arranged rescues for six financial institutions in the past two weeks. The Nikkei 225 Stock Average sank below 10,000 for the first time since December 2003 as Asian stocks slumped for a fourth day, extending an equities rout that erased about $2.5 trillion from global shares yesterday.
Banks increased deposits held at the Reserve Bank of Australia by A$92 million to A$9.493 billion yesterday, after those holdings reached a record A$11.04 billion on Sept. 30, the RBA said today on its Web site. Those deposits averaged A$1.7 billion last year.
Borrowing Costs
Australian banks' borrowing costs were little changed after the injection, according to a gauge that measures the availability of funds in the market. The difference between the rate banks charge each other for three-month loans and the overnight indexed swap rate stood at 86 basis points, or 0.86 percentage point, from 88.3 before the RBA operation. The gap has averaged 45 points this year.
Banks hold cash in RBA exchange settlement accounts, on- call deposits at the central bank that receive interest at 0.25 percentage point below the central bank's benchmark rate.
RBA Governor Glenn Stevens will lower the cash target rate to 6.5 percent from 7 percent, according to 16 of 21 economists surveyed by Bloomberg before the decision due at 2:30 p.m. today in Sydney.
Credit Crunch
The cost of protecting investors from Australian corporate bond defaults increased to a record.
The Markit iTraxx Australia index rose 34 basis points to 245, according to prices from Citigroup Inc. The price of the contracts, tied to the debt of 25 companies including Qantas Airways Ltd. and BHP Billiton Ltd., is the highest since the iTraxx benchmarks started in 2004. Sydney trading desks were closed yesterday for a holiday.
The Markit iTraxx Japan index rose 9 basis points to 207, Morgan Stanley prices show.
``Credit markets remain extremely weak and fragile,'' Gus Medeiros, a credit analyst at Deutsche Bank AG in Sydney, wrote in a research note today. ``We expect the market to remain very volatile and thin in the next few days.''
Damage from the credit crunch accelerated over the past month as Lehman Brothers Holdings Inc. and Washington Mutual Inc. collapsed, the U.S. government took control of Fannie Mae, Freddie Mac and American International Group Inc., and Merrill Lynch & Co. and Wachovia Corp. were purchased by rivals.
U.S. Bailout
The U.S. dollar Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, stood at 287 basis points today, after touching 298 points yesterday. It was at 129 basis points two weeks ago and 81 basis points a month ago. The Japanese Libor-OIS spread widened to a record 61.05 basis points.
BNP Paribas, France's biggest bank, agreed to take control of Fortis in Belgium and Luxembourg, completing a breakup of the lender after a government rescue failed. UniCredit SpA Chief Executive Officer Alessandro Profumo said Italy's biggest bank underestimated the severity of the global financial crisis, forcing him to cut profit forecasts and propose raising capital.
The Federal Reserve will double its auctions of cash to banks to as much as $900 billion and is considering further steps, the central bank said today in a statement. The Fed will increase its auctions under the 28-day and 84-day Term Auction Facility operations to $150 billion each. The two forward TAF auctions in November will be increased to $150 billion each. The central bank will also begin paying interest on bank reserves.
Ted Spread
President George W. Bush signed a $700 billion U.S. bailout bill into law last week to help stem the crisis. The legislation enables the government to purchase tainted assets from institutions. European leaders meeting in Paris two days ago pledged to bail out their own nations' banks, while stopping short of a regional rescue effort.
Yields on overnight U.S. commercial paper jumped 0.94 percentage point to 3.68 percent yesterday, according to data compiled by Bloomberg that date back to January 1996. That's the highest since Sept. 30, the day after the U.S. House of Representatives rejected an earlier version of the rescue plan.
The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, was 379 basis points, after yesterday touching 393 points, the widest since Bloomberg began compiling the data in 1984. Writedowns and losses worldwide tied to the U.S. mortgage market have reached $585 billion since the start of last year, according to data compiled by Bloomberg.
