Money markets recover to early 2008 levels: BIS

The financial markets are showing signs of normalising, with interbank money markets recovering to levels not seen since early 2008, the world’s biggest central bank body said Sunday.

“Despite uncertainty about the pace of economic recovery, investors remained cautiously optimistic in the period between end-May and early September 2009,” said the Bank for International Settlements.

In particular, “in interbank money markets, key spreads narrowed to levels not seen since the beginning of 2008”, added the bank for central banks.

The spread of United States rates even fell to the lowest level since the outbreak of the financial crisis in mid-2007, noted the BIS.

The LIBOR/OIS spread or the premium that the London interbank offered rate (LIBOR) trades over the Overnight Swap Rate (OIS) is often taken as an indicator of the level of stress in the money market.

In the aftermath of the collapse of venerable US bank Lehman Brothers, the spread widened sharply as lending froze up. Central banks had to take the extraordinary action of pumping in tonnes of liquidity to get lending flowing again.

In its latest quarterly statistical review, the BIS noted that “signs of receding liquidity premia and rebounding risk tolerance were also evident in bond markets”.

However, there was great volatility in the bond markets as investors appeared to be unsure about the pace of recovery.

“Over time, bond investors seemed to increasingly take the view that the worst of the economic downturn was over, but that recovery was likely to be gradual and vulnerable to setbacks.

“This, in combination with low expected inflation, led them to scale back expectations that monetary policies would begin to normalise anytime soon,” it said.