Going forward I’m going to track and summarize Libor data across the three major currencies: Dollar, Euro and Yen. I’m very keen on looking at this data even though others have pointed out its flaws, which are substantial. I’ll comment on Don’s excellent work later, because he noticed some things that require some honest answers and I’ll want to touch on those things.
But back to Libor. First, let’s take a look at all three curves in monthly snapshots based on data compiled by the Financial Times:
Dollar Libor has been on the rise, nothing too dramatic if you’ve been keeping up. We’ve seen this before.
Euro Libor, remaining stagnant as pond water. Yes there’s a hiccup in the May 11, overnight rate, but I assume (and it looks like it’s clear now) that was the result of funding/liquidity issues in European banks.
Yen Libor. What may be of interest to note here is this curve appears to be bear flattening: short rates are rising, longer dated rates are falling. It’s not much of a move, but given the DV01 we’re dealing with in this day and age, I think it’s worth noting. Plus, this is the first time I’ve ever looked at Yen Libor, so I’d rather document what I observe than not. What’s driving it? Muted inflation expectations, muted lending, muted everything at the long end. Plus, it probably doesn’t help that with carry trades blowing up, we’ve seen more demand for Yen.
Which has lead to some interesting discoveries. Take a look at the term structure of Dollar Libor/Yen Libor spreads. For consistency sake, I defined the calculations as foreign Libor minus dollar/domestic Libor. I could’ve switched the order of the calculation in the Dollar/Yen Libor spread term structure but decided not to. Here’s the chart:
You can see there had been a downward slope that breaks at 1mth and is less negative to the 6mth point, then turns sharply negative at 1yr. That’s interesting, because as we look at the term structure of Euro/Dollar Libor spread term structure, it’s kind of like a mirror image:
Right down the kink at the 6mth point.
But the analysis isn’t complete without looking directly at Euro/Yen Libor spread term structure, which I did here. Here, it’s the Euro Libor rate minus the Yen Libor rate:
This curve has been steepening some. Spreads at the front end are getting cheaper while longer-dated rates are going up. This is mostly a function of the bear flattening of Yen Libor we’re witnessing, because Euro Libor rates aren’t going anywhere fast.
Last chart I’m going to present is a weekly chart of the Dollar/Euro Libor spread term structure from May 18 until now:
We’ve seen 6mth and 1yr spreads widen a touch, 3mth has come back down marginally from its recent peak near 54bps. Whether it’s BaFin or the market has moved on to BP’s plight is anyone’s guess. I don’t think anything has changed in the underlying structural dynamics, but it’s OK. We don’t need every day to be a funding/liquidity panic. It gets draining.