(WSJ) Credit markets may have their first significant thawing in months this week, building on a boost in bank lending on Friday and government moves to restore trust between lenders and borrowers.
But if these markets stay frozen, it would be a sign that a return to normalcy in the financial markets could take longer than investors and policy makers hope.
On Friday, three big banks led by J.P. Morgan Chase & Co. made multibillion-dollar offers of three-month funds to European counterparts, causing an immediate stir in the shriveled markets for unsecured lending.
That raised expectations that lenders would finally open their doors and businesses would be able to borrow again, removing one of the biggest stresses on the global economy.
In response, futures markets are predicting sharp declines in the rates banks charge one another to borrow, with the benchmark three-month Libor, or London interbank offered rate, expected to drop by around half a percentage point from 4.41875% Friday. That would be a multiweek low, but still some way above the 2.8% seen before the collapse of Lehman Brothers in mid-September.
Libor is the benchmark for pricing of all kinds of debt, including corporate borrowing and mortgages. A lasting drop would be a powerful signal of recovery in the banking sector. If banks are prepared to lower their lending rates, it means they are regaining sufficient confidence to resume their normal relationships as creditors, instead of plunging their cash into government bonds and considering central banks the only trustworthy counterparties.
Friday morning, J.P. Morgan Chase lent out between $10 billion and $15 billion in short-term funds to overseas peers at interest rates ranging from 3% to 4.5%, according to people familiar with the matter. The unsecured loans had maturities ranging from overnight to more than one month. Not long after that, other U.S. banks, including Citigroup Inc., followed suit.
The banks grew more comfortable because of recent European-government guarantees for banks and their liabilities, say market participants. Another reason was pending U.S. government infusions directly into U.S. banks, which would free up room on their balance sheets for making more loans.
The amounts lent out Friday weren't large by banking standards, and, by any historical measure, credit markets remain largely closed. But at least some investors took the moves as a hopeful sign.
"We're getting an accumulation of evidence that things are starting to unfreeze," said Carl Lantz, interest-rate strategist at Credit Suisse in New York.
As soon as the J.P. Morgan sighting was reported Friday, Treasury bills, whose short maturities make them the safest paper on the market, lost ground. Selling out of the three-month bill sent the yield Friday shooting up to 0.803%, some 0.36 percentage points higher on the day.
It remains too early to tell whether the return to unsecured lending will continue. Until now, investors had anticipated a gradual loosening in lending constraints, assisted by international central banks' new strategy of auctioning unlimited supplies of dollars but hampered by the usual clampdown in the leadup to the quarter-end accounting period.
This week brings the second in these dollar auctions by major European central banks, which are offering unlimited supplies of 28-day loans. Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co, cited the drop in seven-day Libor following last week's auction of unlimited seven-day funds to support his view that "the downward trend in Libor looks likely to continue."