Signs of the return of the credit crunch continue to appear with short term rates here and in Britain up and rates down sharply in the US as investors moved into safe, liquid securities.

Three separate events marked the return of the crunch:

  • The key indicator rate for much of the world’s international loans and other deals involving funds (swaps etc), three-month London interbank offered rate, or Libor, for dollars rose 7 basis points to 4.95%, the biggest weekly gain in two and a half months.
  • The Fed injected a gross $US47.5 billion in funds into the US interbank market last Thursday to try and bring the cash rate back to the 4.50%, the second time in a fortnight it has made such a move. The first one was $US41 billion, last week’s was bigger; both were the largest injections since September 11, 2001.
  • And in Australia on Friday the Reserve Bank followed the Fed’s lead and added far more cash on Friday to our interbank market than it had done for the previous couple of weeks.

The Reserve Bank of Australia injected more money into Australian money markets on Friday as 180 day bank bills traded at 7.34% and 90 day bills jumped to 7.19% on Friday from 7.12% the day before.

That’s now 0.44% above the cash rate of 6.75% while the six month rate is now more than half a per cent above the cash rate, implying that lenders are becoming more cautious about who they will advance money to in Australia.

Why that should be happening now here, with all our banks in good financial condition after weathering the August crunch with few hits, is strange.

The RBA added $1.71 billion in cash on Friday well above the estimated cash requirement for the day of $719 million.

That was more than three times the $475 injected by way of repurchase agreement on Thursday; The RBA also purchased $100 million of residential mortgage bonds as well that day to take its total injection to $575 million.

As well the bank allowed the exchange settlement account to rise to around $2.9 billion at the end of trading to allow enough liquidity to the banks to get though the weekend. That was the highest the exchange settlement account had been since September 20.

It was the largest amount injected into the markets for several weeks by the RBA and came after a period of declining liquidity support and a return to normal in the interbank bank bill market, which is at the heart of the Australian financial system.

But today they cut that back and added only $460 million when the cash need was around $742 million.

But in the longer-dated US Treasuries market, 10 year bonds closed around 4.16%, the lowest for more than two years a sign of the continuing concern investors have about the immediate outlook for shares, credit markets and commodities.