Libor rises to highest level in 10 months

Steve Dinneen
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THE COST of borrowing dollars on London’s inter-bank lending market has soared to its highest level in almost ten months, on fears that banks exposed to the European debt crisis could fall into serious difficulties.

The three-month Libor edged above 0.5 per cent for the first time since July, amid concerns another liquidity crisis is in the offing, according to the British Bankers’ Association.

Traders are spooked by a rising Libor because it also increased steadily in the weeks before Lehman Brothers collapsed, serving as a warning signal for the credit crunch and financial crisis.

Corporate bond issuance is also expected to suffer its worst month in a decade.

Fear of the contagion spreading from Greece to other Eurozone countries has caused yields to rocket at their fastest rate since the darkest days of the credit crunch.

Firms have slashed the amount of debt issued from $183bn (£127bn) last month to just $47bn. This is the least since 1999, according to data collected by Bloomberg.

Only the safest corporate bonds are attracting customers as investors batten down the hatches and prepare for another economic storm.

The corporate bond market has taken a thrashing from the Eurozone crisis and fears over tough new legislation being discussed in Washington that could curb bank profits. The constricting market threatens to spark a second wave of the liquidity crisis that caused the global economy to grind to a halt.

Yields on corporate bonds compared to government bonds shot up from 149 basis points last month to 188, according to Bank of America Merrill Lynch’s index – the fastest growth in spreads since October 2008 when they grew by more than one per cent to 467.

Junk and speculative bonds have predictably been the hardest hit. Spreads on junk bonds have expanded 141 basis points this month to hit a whopping 702.

Elizabeth Afseth, fixed income strategist at Evolution Securities, told City A.M. the situation is likely to deteriorate.

She said: “This is being driven by uncertainty over sovereign debt. A couple of weeks ago the markets were close to collapse, then the rescue package helped but now investors are experiencing further uncertainty.”