Well that didn’t take long. Yesterday I was speculating rates would go up, and here it is:
You can see my note on the chart. Now let’s take a look at the term structure of spreads between Dollar and Euro Libor:
The curve is flattening, in a big way. With ECB open market operations results in now, the liquidity picture is, well, unclear. Folks cheered yesterday’s 3mth LTRO, saying it wasn’t as big as expected, but results of today’s 6 day operation and yesterday’s weekly MRO suggest to me there are definitely a bunch of banks in a world of hurt. Why else would you borrow money for 6/7 days at 1% when the Libor market allows you to lock up 6mth Euro Libor funding at the same rate?
I think FT Alphaville put it best (emphasis, mine):
And now that we know we’re looking at a two-tiered existence for eurozone banks — those that can fund themselves in the interbank market and those that still have to rely on the ECB — we can guess that a rapid rise in rates could be difficult for some to take. In which case, we could still see rates like Eonia and Libor rise on fears of bank counterparty risk. It’s a tough job, this weaning-off-liquidity thing.
And, some might say, still a highly-improbable outcome.
In other words, this may be just the beginning.
The ECB is just trying to use methadone on heroin addicts at this point. We’ll see how this goes…