RBA rate may no longer be floor for borrowing costs

Bloomberg

A disappearing spread between money-market rates and expected policy equivalents indicates the Reserve Bank of Australia’s (RBA) official cash rate may no longer serve as the floor for borrowing costs.
The three-month bank-bill swap rate — a gauge of Australian borrowing costs — has continued to slide, with its spread over a similar-tenor overnight index now poised to fall below zero for the first time since 2007. As the RBA pays 0.1% on exchange-settlement balances — while keeping its official cash-rate and target for three-year bond yields at 0.25% — lenders’ deposits at the central bank’s ES accounts have soared to a record.
“As the RBA floods short end with cash, most instruments are being crushed against the 0.10% rate earned on exchange-settlement balances,” Philip Brown and Martin Whetton, strategists at Commonwealth Bank of Australia, wrote in a note.
As Australia’s money-market spread slid towards zero, its US equivalent also dropped. The differential
between three-month forward-rate agreements and overnight-index swaps fell about two basis point to 37 basis points.
UBS expects the June FRA/OIS spread to narrow to mid-20 basis point levels, according to a note. “It seems unrealistic to talk about a persistent large bank funding squeeze when deposits are growing this fast,” strategists including Michael Cloherty wrote.
Funding stress has lessened over the past two weeks across a number of markets, as the Federal Reserve announced a slew of measures to provide liquidity and ease a dollar shortage. The U.S. central bank started its program to buy commercial paper on Tuesday.
The Fed’s Commercial Paper Funding Facility buys three-month corporate, asset-backed and municipal commercial paper. The purchase rate for top-tier commercial paper was set at 1.18%, according to the Federal Reserve Bank of New York, compared with 1.19% in the market.