Thursday, October 10, 2013
Tibor Slides To 7-Year Low
TOKYO (Nikkei)--Interest rates on bank loans are falling further, with the benchmark three-month Tokyo interbank offered rate dipping to its lowest in more than seven years Wednesday.
Rates are expected to remain low as long as the Bank of Japan keeps up its massive purchases of government bonds.
The Tibor is the average of quotes that 15 reference banks, including foreign institutions, supply to the Japanese Bankers Association. The three-month Tibor slipped to 0.2227%, a level not seen since May 2006.
When procuring short-term funds, businesses determine which is more advantageous: paying interest on bank loans -- usually the Tibor plus a premium -- or issuing their own debt.
"With rates on commercial paper from companies with high credit ratings standing below 0.1%, financial institutions have no choice but to lower their interest rates," says Toshiaki Terada at Totan Research Co.
Even medium-term rates are heading south again in the bond market. The yield on two-year government bonds came to 0.095% on Wednesday, below the annualized 0.1% interest rate that banks can earn by parking funds exceeding the required reserves at the central bank.
The decline in yields on short- and medium-term government bonds is driven by the BOJ's unprecedented bond buying. In the two weeks after 5.7 trillion yen in three-month bonds were issued Sept. 17, the central bank snapped up 800 billion yen of the total.
Even if banks purchase bonds with yields below the 0.1% rate on extra deposits at the BOJ, they may eke out a profit if they sell them right away to the central bank.
"Sometimes we use the funds in our current account at the BOJ to buy short-term government bonds," an official at a major bank admits.
(The Nikkei, Oct. 10 morning edition)