Well, glad we got that piece out of the way:
The European Central Bank said it will lend banks 131.9 billion euros ($161.5 billion) for three months, less than economists had forecast as a landmark year- long loan expires.
This was actually better than anticipated, because many analysts and pundits had speculated there would be higher demand for the 3 month facility than there was. Indeed, the €442bn facility expires tomorrow, so with €132bn being rolled into 3mth money, that leaves €310bn to be settled or funded via other means.
The terms of the ECB facility (from the article):
The Frankfurt-based ECB said 171 banks asked for the three- months funds at its benchmark interest rate of 1 percent. It fills all bids against eligible collateral. Banks can currently borrow three-month money from each other in the market at about 0.76 percent.
This spread is the key tell. Right now it stands at 25bps, but I wonder if we see that spread tighten. Of course, to have complete visibility into the situation, we’ll have to keep an eye on the rates being offered by all the panel banks, not just the middle 8 used in calculating the Libor rate. But if we see that spread tighten, to me it would indicate a real sign of stress.
But we’ve already been seeing 3mth as well as 1yr Euro Libor rise. As of my last update, 3mth and 1yr Euro Libor are up 3.5 and 2.5bps respectively over the past month. 1yr Euro Libor is at 1.27% as of June 25, a 27bp premium to the ECB facility.
So we may need to keep an eye on 1yr Libor to see what happens here. My guess is we’re going to see it move higher.