Comments on: Money Market Spreads Signal Continued Stress http://www.nakedcapitalism.com/2008/07/money-market-spreads-signal-continued.html Mon, 23 Nov 2009 06:07:28 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: RebelEconomist http://www.nakedcapitalism.com/2008/07/money-market-spreads-signal-continued.html#comment-12234 RebelEconomist Tue, 29 Jul 2008 14:40:00 +0000 http://www.nakedcapitalism.com/2008/07/money-market-spreads-signal-continued-stress/#comment-12234 There is so much vague writing on this subject (Francesco Giavazzi's piece on RGE was similarly sloppy) it is hard to make much of it. My understanding (someone please correct me if I am wrong) is that an OIS rate is the fixed side of a swap against the overnight policy rate. This is (abstracting from details like whether the difference is exchanged daily or at the end of the contract) is practically the expected policy rate for the period of the swap. In other words, the OIS rate tells you about monetary policy expectations and not much about credit/liquidity. Where the policy rates that the OIS swap refers to are repo rates, the spread between the swap rate and the LIBOR rate FOR THE SAME TERM, does tell you something about credit/liquidity. Comparing three month sterling and euro LIBOR rates with the overnight policy rates (as the FT does) is therefore only a poor (noisy) "barometer of banks' need to raise capital". There is so much vague writing on this subject (Francesco Giavazzi’s piece on RGE was similarly sloppy) it is hard to make much of it. My understanding (someone please correct me if I am wrong) is that an OIS rate is the fixed side of a swap against the overnight policy rate. This is (abstracting from details like whether the difference is exchanged daily or at the end of the contract) is practically the expected policy rate for the period of the swap. In other words, the OIS rate tells you about monetary policy expectations and not much about credit/liquidity. Where the policy rates that the OIS swap refers to are repo rates, the spread between the swap rate and the LIBOR rate FOR THE SAME TERM, does tell you something about credit/liquidity. Comparing three month sterling and euro LIBOR rates with the overnight policy rates (as the FT does) is therefore only a poor (noisy) “barometer of banks’ need to raise capital”.

]]> By: ryb http://www.nakedcapitalism.com/2008/07/money-market-spreads-signal-continued.html#comment-12221 ryb Tue, 29 Jul 2008 11:08:00 +0000 http://www.nakedcapitalism.com/2008/07/money-market-spreads-signal-continued-stress/#comment-12221 I think it's important to remember that LIBOR is unsecured + banks simply do not trust each other = wide spread. Nobody trust them - you can see the same thing in bond spreads, i.e. BBB US banks to Treasury, which has widened from ~100 bp a year ago to 340 today. Or look at bank CDS spreads.<br/><br/>Secured lending (repo) backed by quality collateral (blue chips, Sovereigns) has widened over the same period by 20-30 bp with no changes in haircut, margin calls etc. The banks just don't have good quality collateral to use, partly as a result of all the CDO etc. crap on their books and partly as a result of the nature of their business. <br/><br/>Time heals all wounds. At some point in the future, only (mostly) quality collateral will remain, and we should know who’s holding what. At that point, LIBOR spreads should narrow, but banking activity should be much less, as a result of deleveraging.<br/><br/>Other than that, I don’t see any miracle cures. Central Banks swapping crappy collateral for Sovereigns certainly helps on the margins, but there balance sheets are just not big enough to save all the banks.<br/><br/> - Meanwhile, I see US banks in Europe are slightly up (11:00 GMT), although liquidity there is worse. We’ll see what happens when the US opens. Maybe the worst is behind us :) I think it’s important to remember that LIBOR is unsecured + banks simply do not trust each other = wide spread. Nobody trust them – you can see the same thing in bond spreads, i.e. BBB US banks to Treasury, which has widened from ~100 bp a year ago to 340 today. Or look at bank CDS spreads.

Secured lending (repo) backed by quality collateral (blue chips, Sovereigns) has widened over the same period by 20-30 bp with no changes in haircut, margin calls etc. The banks just don’t have good quality collateral to use, partly as a result of all the CDO etc. crap on their books and partly as a result of the nature of their business.

Time heals all wounds. At some point in the future, only (mostly) quality collateral will remain, and we should know who’s holding what. At that point, LIBOR spreads should narrow, but banking activity should be much less, as a result of deleveraging.

Other than that, I don’t see any miracle cures. Central Banks swapping crappy collateral for Sovereigns certainly helps on the margins, but there balance sheets are just not big enough to save all the banks.

– Meanwhile, I see US banks in Europe are slightly up (11:00 GMT), although liquidity there is worse. We’ll see what happens when the US opens. Maybe the worst is behind us :)

]]> By: Hubert http://www.nakedcapitalism.com/2008/07/money-market-spreads-signal-continued.html#comment-12213 Hubert Tue, 29 Jul 2008 08:55:00 +0000 http://www.nakedcapitalism.com/2008/07/money-market-spreads-signal-continued-stress/#comment-12213 reg LIBOR rates<br/><br/>The FT article barely scratches the surface. We know that LIBOR is an artificial indication of a practically no- longer-existing lending form (threee month unsecured interbank lending).<br/><br/>We know that WEstern banks refinanced themselves to a big estent with Asian money which lent in some accordance to LIBOR.<br/><br/>This is over. Real LIBOR rates would certainly look higher, maybe 200 or 300 Basispoints instead of 70.<br/>Nobody want to show or see those spreads. So the central banks fund the commercial banks and commercial banks pretend they lend to each other for three months at spreads around 70 - and pocket this spread in their variable lending rates.<br/><br/>So far so good. But where do we go from here? The FT article implies that we have to get back to old spreads (15-20 BP). This looks nonsensical in the current environment. There is no way this can happen without first recapitalizing and/or nationalizing the big banks.<br/><br/>Any scenarios in this braintrust? reg LIBOR rates

The FT article barely scratches the surface. We know that LIBOR is an artificial indication of a practically no- longer-existing lending form (threee month unsecured interbank lending).

We know that WEstern banks refinanced themselves to a big estent with Asian money which lent in some accordance to LIBOR.

This is over. Real LIBOR rates would certainly look higher, maybe 200 or 300 Basispoints instead of 70.
Nobody want to show or see those spreads. So the central banks fund the commercial banks and commercial banks pretend they lend to each other for three months at spreads around 70 – and pocket this spread in their variable lending rates.

So far so good. But where do we go from here? The FT article implies that we have to get back to old spreads (15-20 BP). This looks nonsensical in the current environment. There is no way this can happen without first recapitalizing and/or nationalizing the big banks.

Any scenarios in this braintrust?

]]> By: a http://www.nakedcapitalism.com/2008/07/money-market-spreads-signal-continued.html#comment-12208 a Tue, 29 Jul 2008 07:23:00 +0000 http://www.nakedcapitalism.com/2008/07/money-market-spreads-signal-continued-stress/#comment-12208 The USD money market isn't bad at the moment. The real borrow rate is less than 20 bips over Libor and under 3%. So it's not back to normal, but it's not signalling any disasters to come. The USD money market isn’t bad at the moment. The real borrow rate is less than 20 bips over Libor and under 3%. So it’s not back to normal, but it’s not signalling any disasters to come.

]]> By: doc holiday http://www.nakedcapitalism.com/2008/07/money-market-spreads-signal-continued.html#comment-12205 doc holiday Tue, 29 Jul 2008 06:14:00 +0000 http://www.nakedcapitalism.com/2008/07/money-market-spreads-signal-continued-stress/#comment-12205 S T R E S S??<br/> WSJ says:<br/><br/>Shares of Merrill Lynch & Co. Inc. led the financial sector lower, dropping 11.5% amid heavy activity among bearish investors in the options market. The stock hit a 52-week low of $24.26 a share and ended at $24.33 a share, as last week’s brief relief gave way to more insecurity. But options analysts had a hard time pinning down the reason behind the decline, as Mike McCarty, options strategist at Meridian Equity Partners, says there was “nothing to explain the pick-up in implied volatility.” Same goes for the credit markets, where credit-default swaps of Merrill, which measure the cost of insuring its debt against default, rose to $355,000 to insure $10 million in bonds against default for five years, up from $310,000 Friday, according to Phoenix Partners Group. Heavy bets were made in both August and September options, with more than 11,000 put options changing hands at the September $22.50 strike price. “We’re starting to see 10% moves as not uncommon on a daily basis,” says Chris Rich, Newedge Group senior options strategist. S T R E S S??
WSJ says:

Shares of Merrill Lynch & Co. Inc. led the financial sector lower, dropping 11.5% amid heavy activity among bearish investors in the options market. The stock hit a 52-week low of $24.26 a share and ended at $24.33 a share, as last week’s brief relief gave way to more insecurity. But options analysts had a hard time pinning down the reason behind the decline, as Mike McCarty, options strategist at Meridian Equity Partners, says there was “nothing to explain the pick-up in implied volatility.” Same goes for the credit markets, where credit-default swaps of Merrill, which measure the cost of insuring its debt against default, rose to $355,000 to insure $10 million in bonds against default for five years, up from $310,000 Friday, according to Phoenix Partners Group. Heavy bets were made in both August and September options, with more than 11,000 put options changing hands at the September $22.50 strike price. “We’re starting to see 10% moves as not uncommon on a daily basis,” says Chris Rich, Newedge Group senior options strategist.

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