Money market calm not seen until Q1: Federated

NEW YORK (Reuters) - Strains in money markets are not likely to abate until well into the first quarter of 2008, a leading money fund manager said on Monday.

Libor, or the London interbank offered rate, the main short-term borrowing rate in Europe, is likely to remain high into the first quarter, said Deborah Cunningham, who manages Federated Investors' U.S. and euro money market funds totaling $210 billion in assets. She spoke at the Reuters Investment Outlook 2008 Summit in New York.

In Europe, "banks are not trustworthy of each other" in short-term lending markets, said Cunningham, chief investment officer for taxable money markets at Federated Investors Inc.

"Until there is a lot of year end of reporting, that rate (the spread of Libor over the U.S. fed funds target rate) will stay wide," Cunningham said.

On Monday, one-month euro-denominated Libor rates rose to 4.89625 percent, the highest level since December 2000 LIBOR.

That's about 39 basis points above the key short term lending rate the U.S. Federal Reserve sets, the fed funds target rate, which stands at 4.50 percent. Most market analysts expect the Fed to cut that rate by at least 25 basis points at its policy-setting meeting on Tuesday.

In money markets, two factors are forcing up short-term lending rates, Cunningham said. First, December is traditionally illiquid because banks need more short-term cash on hand for the holiday period.

Second, the credit market strains that erupted in August are persisting, she said. Banks are holding more cash to cover their potential losses from riskier securities. Also, lenders in interbank markets are concerned about counterparty risk, or the danger that borrowers may not be able to repay loans.

While U.S. banks report their latest period earnings this year, markets will have to wait until six to eight weeks into the new year before European banks release their latest earnings. Only then and "once we're finished with all the illiquidity of December," the Libor spread over the fed funds rate "will start to be erased," Cunningham said.  Continued...