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Dollar funding rates down but spreads widen
* NZ swaps, futures price in deeper rate cuts
By Vidya Ranganathan
SINGAPORE, Jan 15 (Reuters) - Dollar lending rates extended their gradual decline in Asia on Thursday, but swap spreads reversed a week of tightening as economic and banking worries were re-ignited.
In New Zealand, the swap and futures markets were pricing in as much as 200 basis points more of rate cuts after a survey showed business confidence was at a 33-year low in the last quarter of 2008.
The rate on three-month dollar funds in Singapore dropped to 1.09036 percent, barely below 1.0971 percent on Wednesday but still marking its lowest level since early 2004.
But the two-year dollar swap spread, the mark-up of swaps over comparable treasury yields, jumped to 54.5 points, its widest in a week, over concerns about the breakup of Citigroup coming on the heels of awful U.S. jobs and retail sales data.
Other spreads too halted a multi-week narrowing trend. The TED spread, the spread of interbank rates over Treasury bill yields, was steady at 97 basis points at the 3-month tenor, having tightened from a peak of 470 points on Oct. 10.
NEW ZEALAND
Yields have meanwhile fallen sharply this week in New Zealand after the business sentiment report, which was quickly followed by a Standard & Poors warning of a rating downgrade owing to the risks posed by the country's widening external deficit.
The New Zealand Institute of Economic Research survey, released on Tuesday, showed a net 64 percent of firms expected general business conditions to deteriorate in the next six months, while 3 percent of firms expected to reduce prices in the coming quarter.
Analysts said expectations were now for the Reserve Bank of New Zealand to cut its official cash rate by 100 basis points to 4 percent at the end of January, against earlier estimates of a half point easing.
RBC Capital Markets strategist Sue Trinh said the S&P announcement suggested downside risk to her already aggressive forecast for the cash rate to hit 3 percent by mid-2009.
The overnight-indexed swap had discounted that scenario, she said, adding "this doesn't necessarily mean that the market will stop pushing rates lower".
New Zealand bank bill futures <0#NBB:> showed markets pricing in 90-day yields at 3.38 percent, a 100 basis points below actual yields on Thursday. The OIS market showed one-year rate expectations at 3.08 percent.
ANZ-National Bank markets economist Khoon Goh said the survey had caused the across-the-board rally in bills and futures, thereby driving down yields.