(Bloomberg) —

The most stressed money markets since the beginning of the pandemic are the ones that have been scrambling for dollars after the toughening Western sanctions on Russia. This has prompted calls from central banks for assistance.

It was the highest cost since March 2020 to convert both yen or euro payments into dollars by using cross-currency basis Swaps for three months. Since March 2020, the FRA/OIS spread (a gauge of funding stress that is used to measure future Libor) has been widening for contracts lasting one month.

The gyrations suggest concerns that dollar funding costs could increase amid sanctions on Russia’s economy and central bank. Zoltan Pozsar from Credit Suisse Group AG believes that the exclusion of Russian lenders in the SWIFT messaging network could cause missed payments. This would prompt the monetary authorities, Credit Suisse Group AG strategist Zoltan Pozsar to provide dollars to the market.

“We are likely to see some emergency measures including EUR and USD swap lines in the coming days,” said Mohit Kumar, a London-based managing director of interest-rate strategy at Jefferies. “The immediate concerns of central banks would be to maintain a proper functioning of the funding markets and prevent any stress in the banking system.”

These moves are similar to those in financing markets that were triggered the the global run of the greenback by the coronavirus epidemic, but not at the same rate. Through swap lines, the Federal Reserve became the lender-of-last resort and helped to ease the rush for dollars. 

Credit Suisse Group last week estimated that Russia held around $300 billion in foreign currency offshore. This could cause disruption to money markets if sanctions are applied or the country moves suddenly to get out of them. 

Concerns that the Ukraine crisis’s impact is putting stress on fixed income markets are growing as Fed and peers accelerate tightening of policy have been exacerbated by these dislocations. 

“Details on sanctions were fairly vague so the market will be looking for more clarity, but there is no doubt the goal of the sanctions is to drive a liquidity crisis within the Russian economy,” said Prashant Newnaha, an Asia-Pacific rates strategist at TD Securities. “The moves in front-end basis aren’t too surprising, a classic risk-off move, while spreads are wide and liquidity thin.”

The three-month basis in euro-dollars — which governs costs to traders for swapping interest rates between currencies — dropped as high as 26 basis points and dipped to minus 49.5 base points. The equivalent measure for Japan’s yen fell as much as 29 basis points to minus 64 basis points. 

(Updates across all European markets.

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