Libor Climbs Most Since March on Bets for Fed Rate Increase

June 8 -- The cost of borrowing in dollars between banks rose the most in almost three months on growing speculation policy makers will start increasing interest rates by the end of the year.

The London interbank offered rate, or Libor, for three- month loans jumped two basis points to 0.65 percent today, according to the British Bankers’ Association. It was the biggest increase since March 10. The Libor-OIS spread, a measure of the unwillingness of banks to lend, climbed for the first time in four days, widening almost three basis points to 42 basis points.

Signs that the global economy is emerging from the deepest slump since World War II are fueling bets the Federal Reserve will raise its target interest rate by year-end. Fed funds futures showed a 32 percent likelihood that the central bank will lift its target rate to 0.5 percent at its September meeting, up from a 16 percent chance a week ago.

“Maybe the market thinks things aren’t going to be as easy as they started believing they would be,” said Natalia Druzhinina, a money-market trader at the dollar desk at Bank of Ireland in Dublin. “If you look at Libor-OIS spread forwards, there is definitely the possibility for rate hikes priced in.”

Contracts in the forward market show traders are betting the Libor-OIS spread will widen to 62 basis points by December, according to data compiled by Tullett Prebon Plc, the second- biggest broker of interbank transactions after ICAP Plc.

Ted Spread

Lending between banks began to seize up in August 2007, when losses linked to the collapse of U.S. subprime mortgages left financial institutions with billions of dollars in securities and financial contracts they couldn’t value. Losses and writedowns at the world’s biggest financial companies since the start of 2007 have grown to $1.47 trillion.

The TED spread, the difference between what the Treasury and banks pay to borrow for three months, widened for the first time in five days, increasing to three basis points to 48 basis points today.

Libor, used to set borrowing costs on about $360 trillion of financial products globally, jumped to 4.82 percent after the collapse of Lehman Brothers Holdings Inc. The Libor-OIS spread, which averaged 11 basis points in the five years preceding the credit squeeze, rose to 3.64 basis points. It is still 17 basis points above the level former Fed Chairman Alan Greenspan said he considered “normal.”

Royal Bank of Canada quoted the highest rate today for three-month dollar loans, at 0.83 percent, while Deutsche Bank AG contributed the lowest, at 0.54 percent, a difference of 29 basis points. That compares with a dispersion of 28 basis points at the end of last week.