Since I’m home, thought I’d do an update on Libor to see where things stand. Seems the trend of higher rates is still holding, so in other words: Not. Good.
The spread between dollar and euro Libor continues to contract, with the curve getting flatter and flatter as time moves forward. This should give you all the evidence you’ll ever need to see that the Fed’s actions regarding cross currency swaps are not working. This is fodder for a new post I have noodling around in my head at the moment.
The dollar Libor curve continues shifting up and it’s getting more asymmetric. Mid and longer-dated Libor rates are shifting higher and faster than the front end of the curve. That makes me think banks are not only more worried about funding, but also that they’re more guarded about funding in the second half this year than they have been previously. I wouldn’t say it’s concrete evidence of a double-dip recession looming, but if they’re worried about funding and counterparty credit, that isn’t a good sign. At all. Also consider this: overnight Libor is above the Fed’s upper target of 25bps and has been 5bps higher for just about all of May. I’ll need to dig up some data and compare overnight dollar Libor to Fed funds over time. to see what this means. At the moment, a 5bp spread between the two is not that much to worry about. But it shows short-term funding is still more volatile than I’m sure central bankers of all stripes would like.
Here’s proof of what I said about longer-dated dollar Libor moving higher faster than short-dated Libor. 3mth Libor has been pushing up 6mth and 1yr Libor rates. You can see over this limited dataset that the correlation between 3mth, 6mth and 1yr is stronger than overnight and 1mth, which have remained relatively tight. Also, it goes to show from a maturity vs. cost of funds standpoint that banks and counterparties that borrow at the short end of the Libor curve are relatively indifferent between overnight & 1mth money. So there’s a high degree of confidence in the ability to roll short-dated paper and there’s little worry in funding costs when it is rolled.
Euro Libor is still cryogenically frozen. Or is it being suffocated? Can’t tell for sure but it makes me wonder when there will be any demand for euro denominated funding. Plus, there’s this tidbit from Reuters that I’m thinking may explain that hump in overnight Euro Libor we saw in the middle of the month:
BBVA has been unable to renew about $1 billion of U.S. commercial paper since early May, The Wall Street Journal reported on Wednesday, citing people familiar with the matter. The report said the bank still has “substantial” funding and deposits in Europe and roughly $9 billion in U.S. commercial paper outstanding.
Not a smoking gun, but it points to short-term funding problems that I had suspected had been going on in Europe.
All the talk of liquidity drying up in European commercial paper markets suggests we’re closer to the end of the beginning rather than the beginning of the end in the European credit crunch, which I’m calling Credit Crunch v. 1.5. I’m saving Credit Crunch v. 2.0 for leveraged lending and commercial real estate losses hit, which will be sometime after we get past the record delinquencies we’re seeing at this point. Consider this tidbit:
Nationwide the delinquency rate for commercial mortgage-backed securities loans hit a record high 8.02 percent in April, according to New York-based data firm Trepp LLC. In 2009, the delinquency rate was 2.45 percent.
More than three times higher than we were a year ago. But the real losses will only come to light as the collateral (i.e. delinquent property) is sold off and loan recoveries are realized (or not).
At which point, the whole process more than likely repeats itself…