US Treasury Secretary Timothy Geithner's bank-rescue plan unveiled on Tuesday disappointed markets with its lack of detail, despite including a proposal to soak up $500 billion (Dh1.84 trillion) to $1 trillion (Dh3.68 trillion) of bad assets from struggling banks and expanding a Federal Reserve programme to support new loans.
Stock markets in the United States and in Asia fell as investors worried about the sketchy details of the plan and its ability to unfreeze credit markets.
That uncertainty spilled onto money markets in Asia, where analysts believe expectations about the bank rescue plan have been built up quite significantly, and whose success is more vital to restoring normalcy to lending markets than the new US administration's stimulus plan.
The administration's $800-billion-plus stimulus bill – a mix of tax cuts and public spending measures – was approved by the Senate on Monday, but that version must be reconciled with one passed by the House of Representatives, which may require several days of negotiations.
"The equity market response and the rally in the bonds overall gave a pretty clear indication that the market was disappointed with the announcement and the lack of detail in particular regarding the set up of the so-called bad bank and ability to take poorly performing assets off the financial system," said Adam Donaldson, head of debt strategy at Commonwealth Bank.
"You need to see some of the risk involved in transacting with counterparties in the financial system removed."
Donaldson said even though there has been a lot of progress made on that front after various governmments provided guarantees, liquidity backstops and capital injections, the scale of losses still expected to be announced was large.
"It remains unclear how the financial system is going to cope with the need to recapitalise as those unfold," he said.
US dollar funding markets in Singapore were quoting three-month dollars at 1.23 per cent, a shade higher than 1.22468 per cent on Tuesday and much higher than levels of 1.09 per cent in mid-January.
Eurodollar futures rose to 98.825 in Asia from 98.79 late on Tuesday, indicating expectations for a dip in interbank yields.
The two-year dollar swap spread expanded to 69.75 basis points while the three-month OIS spread, the spread between interbank rates and overnight-indexed swaps, narrowed to 96 basis points from 98 the previous day.