Money markets tight before Congress vote

Global money markets remained tight on Friday as banks waited to see if the U.S. Congress would pass a bill aimed at helping unfreeze credit markets, and speculation grew about interest rate cuts, perhaps coordinated, by major central banks.

The U.S. Senate's approval of a $700 billion financial sector bailout package on Wednesday has had little impact, with the House of Representatives still to vote and financial markets smarting from its rejection of an earlier version.

"If things don't improve after Congress passes the bailout package, then that increases the chance of a coordinated rate cut," said a senior currency trader at a U.S. investment bank in Hong Kong ahead of a vote that could come on Friday.

"Banks are still not lending to each other. It's pure counterparty risk fear."

Massive central bank cash injections have helped keep trading going on an overnight basis since the start of the October-December quarter, but interbank lending conditions in three-month funds have kept deteriorating.

The lack of confidence within the banking sector was magnified by the collapse of Lehman Brothers last month and the failure of banks in Europe.

The two-year U.S. interest rate swap spread -- a gauge of financial system stress -- was quoted at a record high 166.5 basis points in Asia, suggesting that fears about defaults among banking counterparties were worsening.

But overnight dollar funds in Asia were quoted at 1-3 percent in Thailand and 2-2.5 percent in Singapore, falling for the second day, traders said. That was down from 3.0-4.5 percent on Thursday and around 6 percent on Wednesday.

The cost of dollar funding hit 10 percent last month when Lehman failed.

In Tokyo, the Bank of Japan (BOJ) injected 800 billion yen ($7.6 billion) in an over-the-weekend operation on Friday to provide funds to foreign banks struggling to secure cash from Japanese lenders.

The rate of 0.60 percent was down from 0.75 percent for similar injections earlier in the week and the BOJ skipped its afternoon operation, suggesting a reduced need for funds.

Australia's central bank added A$1.57 billion ($1.2 billion) in repurchase agreements, way above an estimated daily need of A$1.195 billion, which should keep banks' cash cushion with the Reserve Bank of Australia (RBA) near an historically high A$9 billion.

The injection of funds plus speculation about an official rate cut have helped pull money market rates down a bit in Sydney.

The spread between three month rates and the expected average central bank cash rate has narrowed this week to 80 basis points from record highs around 96 last week, but it remains way above typical levels around 10 basis points.

A big cut of 50 basis points in the central bank's official rate has been priced in by markets for Oct. 7, following a 25 basis point reduction to 7.0 percent in September, the first in seven years.