Real quickly, I want to revisit this post from last week because I compiled some Euribor curves, looking for signs of stress in European banks. I noted there was no sign of any fear:
Here are updates of EONIA swaps and Euribor:
EONIA has started to flatten out, particularly dramatic in the long end of the curve. But the front-end remains anchored.
And then it hit me…
They don’t matter.
Here’s what matters: the spread between dollar Libor and Euro Libor. I compiled monthly snapshots of the curve going back to the beginning of the year (I love my readers but I’m not compiling 150+ daily Libor curves by hand):
You see it compressing rather dramatically. The reason is dollar Libor has been catching up to Euro Libor. The mad dash for dollars on the European continent is on. So viewed from that perspective, the Euro curves can be shaped any way they want at whatever levels – nobody is using Euros to fund themselves.
And I also noted the TED spread. It’s widening again. The chart is from yesterday, but today’s quote is at 31bps – another 6bp increase:
What makes the spread so disconcerting is this: the last time we saw a gigantic blow-out in the TED spread was before this:
TED blew out before some of these data sets existed. These are all Federal Reserve programs to bolster liquidity in the banking system. They’ve pulled out all the stops, and Fed funds trade around a range instead of a target. Everything that could be done has been done to dampen volatility in short-term funding. And it worked.