Bloomberg reports that the most closely watched measure of bank willingness to lend to each other, Libor, showed yet another decline today, a signal that money markets are continuing to mend. The article further noted that today’s is the best since the Lehman failure. That is tantamount to saying the patient is the best he’s been since having a heart attack. Note that rates have not fallen to pre-Lehman levels, and so despite marked improvement, still remain elevated,
The not as encouraging news is that fall in European Libor (as in the London fixing for euro) showed only marginal improvement. Bloomberg reported only a three basis point fall in Libor from yesterday’s level. However, US money market rates showed continued improvement (John Jansen calls the table, “pretty” which to me says how quickly we have adjusted to difficult conditions. Three months ago, the numbers in Jansen’s table and the spreads we are seeing against them would have been viewed with horror).
The cost of borrowing in euros for three months fell to the lowest level since before Lehman Brothers Holdings Inc. collapsed as governments stepped up efforts to boost bank balance sheets and policy makers offered cash to revive lending.
The London interbank offered rate, or Libor, that banks charge each other for such loans dropped 3 basis points to 4.96 percent today, the British Bankers’ Association said. That’s the lowest level since Sept. 12, the Friday before Lehman failed. The overnight dollar rate slid 23 basis points to 1.28 percent, below the Federal Reserve’s target for the first time since Oct. 3.
“The initiatives that governments have taken are beginning to work,” said Laurence Mutkin, the London-based head of European fixed-income strategy at Morgan Stanley. “We’re seeing a lot of improvement.”…
Interbank rates have tumbled in the past week after policy makers in Europe offered lenders unlimited dollar funding. The European Central Bank and the Bank of England today made available as much U.S. currency as required. The ECB allotted $101.93 billion of 28-day cash at a fixed rate of 2.11 percent, while U.K. policy makers loaned $26 billion. The Libor-OIS spread, a measure of cash liquidity, stayed below 300 basis points for a second day.
Treasury three-month bills fell for a fourth day, the longest sequence of declines in 10 weeks, as investor appetite for the safest assets dwindled.
The three-month dollar Libor slid 23 basis points to 3.83 percent today. That’s still 233 basis points more than the Fed’s target rate for overnight loans of 1.5 percent, up from 120 basis points about a month ago. At the start of the year, the spread was 43 basis points. A basis point is 0.01 percentage point.
“We see a slight improvement on the interbank market, but no breakthrough yet,” European Central Bank Executive Board member Juergen Stark said in an interview with German radio station Deutschlandfunk. “There’s a high risk that we’ll see another incident” in the banking sector.