Last week I started expanding my Libor updates to include Yen Libor along with Dollar and Euro Libor. This week I wanted to continue breaking down recent activity in the space and maybe toss out some ideas about what we can see going forward.
So first, let’s take a look at some charts of the respective curves, month-over-month:
Euro Libor seems to be rising now a touch and the pace of the rise we’ve seen in Dollar Libor has slowed. Although I’d offer it looks like both 6mth and 1yr Dollar Libor are rising faster than the front-end of the curve, so it’s steepening a bit. These charts probably shows it better:
Curiously, another hiccup in overnight Euro Libor shows up. 35 days after the previous one. I don’t want to jump to conclusions, because there may well be a logical explanation to this, so I went to the ECB’s website to see if there was a refi operation that may be distorting the curve.
The durations don’t match but the amounts that were refinanced are relatively close. I posited before that I wondered if there was a funding issue then and I guess that’s still an open question. Especially when you hear things about Spanish banks that are less than positive about their funding position.
Here are the updated graphs I made of the term structures of Libor spreads:
Here’s a weekly view of the Euro Libor/Dollar Libor spread term structure, because you need to see a blend of data frequencies to make a real assessment of the Libor market.
The spreads are starting to widen a little again, but as I shown earlier it’s not because Dollar Libor is retreating, but Euro Libor is rising at the longer end of the curve. I’m getting the feeling we’re starting to see a run to boost liquidity, no matter what currency it’s denominated in. Especially when you consider how Libor is calculated. We’re only seeing the middle of the distribution, so we don’t have an assessment of how disperse the data is. That’s an issue.
But the bottom line is this: the term structure of spreads is rising a little, but it’s not from a relaxation in risk aversion. It seems that risk aversion is increasing.
And that’s not healthy…