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MONEY MARKETS-Dollar funding costs up, Malaysia yields drop

2009-02-25 05:53:42 GMT (Reuters)
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* Dollar funding costs, spreads shrug off Bernanke

* Malaysia front-end yields drop after surprise rate cut

* Thai markets price in rate cut but curve steeper

By Vidya Ranganathan

SINGAPORE, Feb 25 (Reuters) - Rallying stock markets and the U.S. Federal Reserve chairman's assurance banks will not be nationalised did little for dollar money markets on Wednesday, where funding costs crept higher and spreads barely changed.

Ben Bernanke's remarks to the Senate Banking Committee on Tuesday, expressing faith that banks could be stabilised without being nationalised, appeared to have appeased investors worrying about equity dilution and huge write-offs.

Yet, dollar funding rates rose slightly in Asia, while trading within ranges they have been in all of this month, and continued to be shackled by worries over deteriorating asset quality, loan foreclosures and the health of financial institutions.

In Singapore, 3-month dollars were quoted at 1.24917 percent, just a bit above Tuesday's 1.24357 percent but still far wider than the 3-month overnight-indexed swap at 0.22 percent.

The TED spread , a risk measure of the spread between interbank rates and Treasury yields, was also nearly steady at around 95 basis points.

"We still have problems to address in the banking sector and we will have pressure on bank balance-sheets continue for a while, as long as you have house prices falling and foreclosures rising," said Jens Lauschke, a strategist at DBS Bank.

"So the positive sentiment that you might have in equity markets doesn't translate into easier positions in the LIBOR interbank market. For LIBOR, my view remains that we are going to have a substantial risk premium."

YIELDS DROP IN MALAYSIA, THAILAND

Short-term yields dropped meanwhile in Thailand and Malaysia, the former in anticipation of a rate cut on Wednesday and the latter reacting to a rate cut on Tuesday.

Malaysian one-year treasury yields have dropped 40 bps to 1.98 percent over the past two sessions.

The rate cut of half a percentage point on Tuesday was not totally unexpected but still caught many investors off guard, given that central bank Governor Zeti Akhtar Aziz signalled a pause in monetary easing when she said earlier this month that rate cuts had been front-loaded.

"In this environment, to have a sell-off at the front-end is very unusual," said DBS' Lauschke, referring to the selling in bonds that followed Zeti's comments.

Meanwhile, fears of increased funding needs for a government trying to pump-prime the economy kept Malaysian long-term yields from falling and the spread between one and 10-year yields was 30 basis points wider on Wednesday.

Likewise in Thailand, despite widely held investor expectations that the central bank will cut its policy rate by half a percentage point to 1.5 percent on Wednesday, the yield curve remained steep. The spread between 10 and one-year bonds <0#THBMK=> is 215 basis points, having widened from 60 at the start of the year.

Short-term rates however have fallen sharply, with one-year yields down to 1.45 percent from 1.74 in a week. (Editing by Jan Dahinten)

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