Cost of Borrowing Tumbles After Fed Decision

The cost of borrowing dollars in Asia fell on Thursday after the U.S. Federal Reserve surprised markets by announcing it would buy large quantities of government debt, spurring hopes of easier rates.

Interest rate swaps (IRS) declined across Asia after the U.S. central bank said it would buy up to $300 billion in longer-term Treasuries to bring down borrowing costs in an aggressive bid to battle a deep recession.

In Singapore, 3-month dollars were quoted at 1.23667 percent, down from the previous day's 1.30063 percent. It inched closer to this year's trough of 1.09 percent in mid-January.

Eurodollar futures rose, with June futures pricing 3-month LIBOR at 1.175 percent, down from the previous day's 1.355 percent and a significant drop from 1.4 percent on Tuesday.

"Even if they are trying to 'control' the longer end of the yield curve to support the housing market, the current move can be called overshooting," said Walter Fuchs, head of capital markets Asia at Dresdner Kleinwort.

He said the long-term implication could be higher inflation because of increased money supply in coming years.

Interest rate swaps and bond yields fell on growing confidence that Asian central banks would cut interest rates without fears of their currencies declining.

Korean won 5-year IRS fell 13 basis points (bps) to 3.48 percent and the Singapore one-year contract dropped to 1.71 percent from 1.875 percent.

"It is very positive for global rates in general.

It takes pressure off yields across Asia," said Simon Flint, strategist with Nomura Securities.

He said Asian rates would have a downward bias for three reasons -- the benchmark effect of the Fed's rates, the weak dollar effect and the inspirational effect from looser U.S. policy giving Asian central banks more confidence to ease.

But heightened uncertainty would mean there could be more volatility in months ahead.

"The dollar's depreciation, the recovery in risk -- these things are fragile and there are a lot of caveats here. So there will be volatility going forward," Flint said.

These fluctuating views were reflected in the market for swaptions or options to enter interest rate swaps.

In the won market, the implied volatility on one-month, one-year swaptions -- which are one-month options to enter into one-year interest rate swaps -- dropped to between 35 percent and 39 percent. They had earlier risen to 38/42 percent from Wednesday's 37 percent.

In Hong Kong, where the currency is pegged to the U.S. dollar, IRS and interbank lending rates also fell but analysts do not expect a strong correlation with U.S. markets. The one year IRS eased to 1.05 percent after closing at 1.16 percent on Wednesday.

The three month HIBOR was fixed at 0.89786 percent, down from the previous 0.92429 percent.

"Previously the HKD curve steepened to a lesser extent than the USD curve on fiscal burden in the US, as we don't have a major fiscal burden here," said Frances Cheung, fixed income strategist with Standard Chartered Bank.

"So this time round the buyback of UST may not have that much impact on HKD rates either," she said, adding that she expected Hong Kong dollar IRS to bottom out around the middle of the second quarter this year.

Hong Kong IRS rates have been rising since mid-January this year and struck a recent peak last week before beginning the current leg of easing.

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