Russian sanctions raise US dollar borrowing costs in funding markets

London / New York — The cost of raising US dollar funding in the euro swap market soared on Monday after Western countries tightened sanctions on Russia over the weekend. This includes the blocking of some Russian banks from the SWIFT international payment system.

The three-month euro cross-currency swap reached 38.25 basis points, the highest since mid-March 2020, the beginning of the coronavirus pandemic, as foreign banks and businesses rushed to raise dollars. I recorded it.

In other words, investors were willing to pay about 38.25 basis points for interbank rates to exchange the three-month euro for dollars.

Last Friday, the three-month cost was 21 basis points, and a month ago it was 8 basis points.

Cross-currency swaps allow investors to raise funds in specific currencies from other funding markets. For example, an institution that needs to raise dollars can raise euros in the euro funding market and convert its proceeds into dollar funding obligations via FX swaps.

Antoine Bouvet, ING’s senior rate strategist, said:

The ruble fell almost 30 percent against the dollar on Monday after Western nations revealed stricter sanctions on Saturday, including blocking some Russian banks from the SWIFT international payment system.

Analysts say the move by the U.S. and its allies to prevent Russia from spending $ 630 billion on central bank foreign exchange reserves over the weekend is the cost of raising dollars for Western companies paid by Russian counterparts. Said it would be high.

Kenneth Blue, FX Strategist at Societe Generale in London, said:

Credit Suisse’s Zoltan Pozsar estimates that Russia has about $ 300 billion in money market products. Forex swaps are $ 200 billion and public and private deposits are an additional $ 100 billion.

The stress was not limited to the euro funding market. Borrowing costs in pounds and yen have also risen to their highest levels since March 2020.

A surge in borrowing costs will hurt transaction volume. The trading desk of a major US bank said the Treasury’s trading volume overnight was lower than the recent average.

Eurozone government bond trading plunged Thursday after Russia invaded Ukraine, according to MarketAxess data.

Concerns about the war between Russia and Ukraine extend to the US funding market.

The spread between the US 3-month forward rate forward contract and the 3-month overnight index swap rate, a funding stress indicator, rose to 19.14 basis points at the end of Monday since early July 2020. It became the maximum.

On a day-to-day basis, the gap was 23.75 basis points hit early in the morning in New York, the highest since May 2020. Higher spreads reflect rising interbank lending risk or dollar hoarding.

Barclays said in a research note that the FRB has introduced several mechanisms that can provide relief to short-term funding markets, such as the FX swap line, if funding stress worsens. The Federal Reserve Board maintains foreign exchange swap lines with many central banks, including the Bank of Japan, the European Central Bank, the Bank of England, the Bank of Canada and the Swiss National Bank.

By Dhara Ranasinghe, Saikat Chatterjee, Gertrude Chavez-Dreyfuss