Our short term credit freeze is refusing to thaw, despite scattered issues by borrowers, such as Westpac, the ANZ and Macquarie Bank, and the Reserve Bank is finding it much harder to cut short term money market interest rates than it thought.

Yields on 180 day paper hit 7.0% this week, the first time for 10 days. It peaked at 7.11% on September 11 at the height of the credit market freeze. It’s now just under 7%. The key 90 day bank bill rate is back around 6.90%, down on its high of 7.10% but above the recent low of 6.84%.

Yields rose this week as the RBA cut the amount of money it was injecting daily into the short term market to see if normal liquidity conditions would see a drop in yields. The bank also sharply reduced the amount that was being left in the Exchange Settlement Accounts (it does that after discussions with the banks). The amount left in the ESAs was cut by two thirds to $1.298 billion on Tuesday.

Since then the amount has risen, and the amounts being injected via repurchase deals on Wednesday and Thursday has risen to be more than the estimated system deficit. Up till then the bank had been injecting less liquidity than the system deficit and cutting the amount left in the ESA.

The injections of liquidity are noticeably smaller than the huge $4 billion plus in August, but yesterday it did repurchase deals totalling $1.445 billion with the market only in deficit by $1.031 billion.

With 90 day bills around 6.90%, there’s still a 0.40% margin above the cash rate of 6.50% which was set with the last RBA rate rise of 0.25% in August.

One factor that could be inhibiting the easing of the squeeze is the “mark to market” principle. Today (and this weekend) is the end of the September quarter for hedge funds and other investors and they have to revalue their assets.

The Fed’s 0.50% cut in rates will help, but no one knows because there haven’t been too many deals to set new price levels.

Here in Australia it’s the end of the financial year for four of our big five banks: the NAB, ANZ, Westpac and St George. They have all been hoarding cash, as well as bringing their funding conduits and Structured Investment Vehicles back on balance sheet and refunding some or all of them.

There’s around $20 billion involved: not all of that has come back on to the balance sheets, but that has absorbed capital and cash.

Equally the banks remain suspicious of each other’s cash and debt positions and are only willing to lend high margins.