Central-Bank Auctions Still in Demand

The strong demand for Term Acution Facility indicate that banks are still grappling with credit crunch... Banks continue to have a healthy thirst for funding, as longer-dated, dollar-denominated auctions by the Federal Reserve, the European Central Bank and the Swiss National Bank received strong interest. The $25 billion, 84-day term auction facility offered by the Fed drew $54.8 billion of bids from 64 banks. A total of 57 banks bid $38.52 billion for $10 billion offered by the ECB in 84-day funds, while 15 participants bid $9.8 billion for the Swiss central bank's $2 billion auction. The interest rate on the Fed auction was unexpectedly high at 2.754%. The rate came below the three-month London interbank offered rate, which banks use to lend dollars to each other and was fixed at 2.804% Tuesday. The difference was just 0.05 percentage point, compared with earlier auctions that have had spreads over 0.1 percentage point. The narrower gap shows that banks are willing to accept a rate closer to Libor and may indicate that U.S. banks still are dealing with money-market turmoil. However, the earlier auctions were dated for only 28 days, making comparisons difficult. The rate on the Swiss auction was 2.65%, possibly indicating less turmoil among European banks. The ECB picks up the Fed's term auction facility number as a flat rate for its own auction. The three central banks began offering coordinated one-month lending in December, and demand has increased over the course of the year. This is the first auction of three-month funds. "The [term auction facility] is indicating that there's more severe credit problems out there," said Tom di Galoma, managing director and head of Treasurys at Jefferies & Co. in New York. "The banking sector just can't get one foot in front of the other. "These facilities are working," he said, "but the problems are too great to work themselves out immediately."