Three Month Dollar Libor Increases

Nearly two weeks ago, it was becomimg apparent that central bank liquidity operations were not merely ineffective, but had become counterproductive in getting banks to lend to each other. As FT Althaville noted:

Liquidity is being thrown at the system, but it’s just making things worse.

By pumping in more money central banks aren’t addressing the fundamental concerns of the banks at all. Going cold turkey is a very unpleasant thing, but the solution isn’t more drugs, even if they alleviate short term pain.

In assuming they can rely on central bank money market operations – which will be expanded (as is the case) when the going gets tough – banks are naturally avoiding lending to each other.

True to recent form, three month dollar Libor rose today and measures of stress in the money markets hit new highs. Reluctance to lend is not surprising, particularly since the determination of settlement prices of over $400 billion of Lehman credit default swaps is today, a big source of anxiety. From Bloomberg:

The cost of borrowing in dollars in London for three months rose as cash injections and interest-rate cuts by 10 major central banks failed to thaw a credit freeze that put stocks on course for their worst week in 30 years.

The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 7 basis points to 4.82 percent today, the British Bankers’ Association said. The rate in Tokyo jumped to the highest since 1998 even as the Bank of Japan added more than $30 billion to the banking system. The overnight dollar rate tumbled 262 basis points to 2.47 percent….

“Central banks are trying to supply liquidity, and in many cases it just comes back to them,” said Robin Marshall, director of international fixed income in London at NCL Smith & Williamson, which oversees about $20 billion in assets. “There’s a real problem in getting people to put their money to work. The fear of counterparty risk is so intense that the only bank prepared to lend at the moment is the central bank”….

Banks in South Korea stopped giving credit to importers…..

The Bank of Japan added 3 trillion yen ($30.3 billion) to the banking system and the Reserve Bank of Australia pumped in A$2.63 billion ($1.8 billion). The European Central Bank today loaned banks $94 billion for four days…

The Libor-OIS spread, a gauge of cash scarcity, climbed to a record 366 basis points….The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, was at 422 basis points. It widened to 423 basis points yesterday, the most since Bloomberg began tracking the data in 1984.

“While the authorities across the globe have taken a host of unprecedented measures to shore up confidence, nothing seems to be working,” Rajiv Setia and Piyush Goyal, strategists at Barclays Capital Inc. in New York, wrote in a report. “Participants are increasingly unwilling to bear counterparty risk with any entity, other than the government, at any price.”

Bond market commentator John Jansen worries this morning that Treasury prices are not behaving as expected, and may be a sign of a turn in sentiment against the dollar:

Prices of Treasury securities are registering mixed changes in overnight trading. “Mixed changes” in this environment is somewhat puzzling and even a bit troublesome.

The US market has always represented the ultimate safe haven venue yet this morning according to my screen at about 700AM New York time the yield on the 2 year note was actually several basis points higher than where it closed late yesterday. Indeed, the yield on every Treasury issue is higher than the level at which it finished in late trading yesterday.Is this the beginning of the end for the dollar and the Treasury market? Is this the first sign of the bursting of the bubble in Treasury securities? That market, in a sense, represents the ultimate bubble as it exists at the whim and caprice of foreign investors, who have as participants in a Faustian bargain, financed our war(s) and our lifestyle so generously over the last decade. Maybe even that bizarre construct is crashing about us as we speak.

I can only say that with financial markets in full retreat and full meltdown it is thoroughly uncharacteristic for prices of Treasury coupon securities to be lower.

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  1. Anonymous

    Another great catch, Yves.

    US Treasuries is the ultimate bubble, and unless a drastic global action plan comes out from this weekends’ meetings in DC, the ultimate bubble will burst a la Vesuvius burst leaving the world of Pompeii behind…

    A great tragedy indeed by few “smart money managers of ultimate greed”…

    And may I say Yves, you are doing a phenomenal public service to masses across globe.

    Merci bien.


  2. Chris

    Thanks for this information. I don’t understand how or where you find all these things you supply, or where you find the time and energy!

    Isn’t the ultimate derivative hedge US treasuries So that if the CDS’s belly up and cause things to happen in other areas of these things, won’t that ultimately end up with people trying to pull cash out of Treasuries to cover expanding losses elsewhere.

    That might be how a run on Treasuries would get started, by people trying to raise cash to cover other “holes”.

  3. Anonymous

    Misguided. Government intervention will extend the problem and subject the system to manipulation for political benefit. Look at what the loose association between the GSEs and government got us; disaster. Now you wish to recreate that on a vastly larger scale?

    How much money would be shoveled into campaigns if the politicians were DIRECTLY involved?

    Nationalization is naïve, foolish, and economically crippling. It’s better to have this crash now and let capitalism weed out the week and incompetent than to have government prop them up.

    Unfortunately, even that just starts the credit cycle anew. What we really need is a return to Breton Woods and a transformation back to a production based economy.

  4. Anonymous

    Does it not seem strange that on the one hand we are told there is no lending and on the other the price of the non-existing lending is becoming the guage for whether there is lending or not.

  5. S

    “Unfortunately, even that just starts the credit cycle anew. What we really need is a return to Breton Woods and a transformation back to a production based economy.”

    Agree fully. The herd needs culling, NOW

  6. David Habakkuk

    While it may well be that those (like Ambrose Evans-Pritchard) who are confident that the dollar will continue to be seen as a safe haven are proven right, it would hardly be surprising if they were proven wrong — and this could happen suddenly and cataclysmically.

    Anticipations of debt deflation have moved back into the mainstream over the past months. And there is a chairman of the Fed whose is on the record as suggesting both that debt deflation must be avoided at all costs, and that in the last resort the technology of the printing press means this can be done.

    Of course, foreign central bankers may simply think Bernanke is wrong, and will end up pushing on a string — or indeed they could think that his more extreme remarks were simply jawboning to massage expectations. But it is hard to be confident that they rule out the possibility that he might have a viable strategy to reduce what could well be a crippling burden of domestic and international debt on the U.S. economy, and that this would involve a radical depreciation of the dollar.

    In this case, as it would be those holders of Treasuries who got out first who lost least, we might well have a state of unstable equilibrium. As long as nobody anticipated that Bernanke was going to activate such a strategy, the dollar would be stable. But as soon as one major player began to suspect that the dollar was going to be trashed and reacted accordingly, everyone might join in the rush for the door.

    And this might happen with very little warning.

    A recent story by the China Editor of the Asia Times noted that China was expected to be a big buyer of the Treasuries required to fund the Paulson plan. A Hong Kong Daily was quoted saying the Chinese would buy at least $200bn. worth, but the Bank of China spokesman declined to confirm this.


    But this is the kind of thing which the Chinese would suggest they were going to do, whatever their actual plans were. If they explained that they were not proposing to stop buying new Treasuries, the rush for the door might start. So they could be expected to make reassuring noises, without formal commitments, quite irrespective of what they intend to do.

    If any major holders of dollars had concluded that Bernanke was going to collapse the dollar and they had to preempt, they might be no more inclined to give advance warning than the Japanese did at Pearl Harbor.

  7. doc holiday

    I keep wondering to myself, not aloud, that what if, the entire wall street financial system is essential like a Krispy Kreme Donuts, Inc?

    The reason I add in Inc., is because of the corporate shareholder equity relationships, versus the metaphorical hole in the middle of many of their products. The Wikipedia history for Krispy fails to point out accounting fraud irregularities, but unfortunately for them, the internet is filled with the reality of many stories detailing the decline in that entity (that empire) and of course stock performance charts are easy to obtain as well.

    The comparison of Krispy to wall street in aggregate can be summed up from this NY Times story: FYI: The report states that every Krispy Kreme employee or franchisee who was interviewed "repeatedly and firmly" denied deliberately scheming to distort the company's earnings or being given orders to do so.

    "The number, nature and timing of the accounting errors strongly suggest that they resulted from an intent to manage earnings," the report said.

    The 10-month inquiry was led by a special committee of two Krispy Kreme board members – Michael Sutton, a former chief accountant at the S.E.C.; and Lizanne Thomas, a senior partner in the Atlanta office of the law firm of Jones Day.

    That story can be found at:
    Report Details Some Failures That Hurt Krispy Kreme

    Published: August 11, 2005

    > The point that needs made over and over, is that wall street continues to be a cesspool of corruption that is in essence an unregulated casino run by a shadow mafia that fails to be accountable to anyone around the globe. The post Enron era and subprime fraud have brought us all to another point in time, where wall street blew it again, only this time, the scale is so vast, that it may be possible that the casino goes under.

    IMHO, if our own corrupt government can't begin an investigation into multi-Trillion accounting fraud and come to terms with the failure of capitalism in this current distorted form — then the system will fail. If Krispy had been able to run wild and to fuel itself on unlimited and unregulated chaos, what would the result have been, other than collapse? Krispy may have been able to phyisically expand donut making operations into some dysfunctional warped nightmare where they could have partnered with wal-mat in a donut monopoly — backed by lobby groups supported by taxpayers that would willingly subsidize the frosting on the offshore donuts.

    That seems like a fairly stupid fantasy, but that is what we have with wall street today, as taxpayers are being asked to pay for spa treatments AIG employees! Our society is being asked to look the other way, while these crooks run our civilization into the gutter, yet it seems that few people really care, few people want to point fingers, because that would take effort and energy, and denial is far easier.

    In retrospect, many people were concerned about the $777 Billion bailout written on the back edge of a cocktail napkin, but then as it exploded into a pork filled bonanza — citizens in America shrugged it off to business as usual, shrugging off the devil-in-the-details and writing off this soap opera as politics or something that was too hard to understand.

    The mistake in all this is to not have accountability and to let the crooks go about expanding their domain, like the cancer it is. If Americans want accountability, they can't walk away from the people in The Senate and Congress that are elected to protect us — I think Americans should demand accountability for not just $777 Billion, but we need to begin a discussion as to what the value of America is and how much it will cost to lose our heritage and our future!

    Also See: On March 29, 1989, financier Michael Milken was indicted on 98 counts of racketeering and fraud relating to an investigation into insider trading and other offenses. Milken was accused of using a wide-ranging network of contacts to manipulate stock and bond prices. It was one of the first occasions that a RICO indictment was brought against an individual with no ties to organized crime. Milken pled guilty to six lesser offenses rather than face spending the rest of his life in prison.
    On September 7, 1988, Milken's employer, Drexel Burnham Lambert, was also threatened with a RICO indictment under the legal doctrine that corporations are responsible for their employees' crimes.

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