Because Libor rates aren’t obscure enough, I’m taking a quick look at EONIA swap rates and the EONIA swap curve. This first chart is really busy since I put all the maturities on one chart going back to January, 2008.
I then took the data and tried to boil it down in terms of just looking at relatively recent experience with fewer maturities. You’ll see over the past few weeks all maturities have seen an increase in rates.
This next chart takes a look at the EONIA swap curve. I took daily snapshots for the past several weeks. Again, it’s a little busy:
But why is EONIA important? It’s important because it is used as the reference rate for interest rate swaps throughout the Eurozone. So banks, insurance companies, multinational companies and others use it to either fix or float their borrowing costs, depending on their capital structure, how they want to achieve their weighted average cost of capital (WACC) objectives, etc.
Note the arrow I put in the chart. You should see a kink where the longer dated rates widened from previous fixings and look to steepen. Since most swaps are done in annual increments, I tend to focus more on longer dated curves so the 1 yr and 2 yr swap rates are what I’m interested in the most. Another sign Euro-denominated funding is getting more expensive.
Here’s another obscure rate to keep track of. It’s actually a spread instead of a rate, but it’s still important: it’s the spread between 2yr Treasuries and 3mth Libor:
This one is interesting because of what it infers. From David Goldman:
If LIBOR continues to creep up and reaches, say, 75 bps, it no longer will be economical for banks to own US 2-year notes. In that case the US Treasury market will be in trouble. That’s when you head for the bomb shelter.
That was written a little while back when dollar Libor was moving higher, almost unabated. Now, it’s not moving much at all but the issues is still the same: it’s one of potential yield curve flattening/inversion and counterparty credit risk. A quick check of rates as of July 1 shows the spread at about 10bps. Precariously close to parity. The green circle is from July ’05 and it was the first time the spread went negative – right around the same time housing peaked. So this can be a good tell regarding overall market conditions, but it’s not watched that frequently.
So bottom line: counterparty issues are taking center stage again, and as a series of fundamental macro metrics, they don’t look that good to me. Growth looks like it has stagnated and is possibly contracting, job growth is weak at best and other metrics aren’t looking so cheery. As this backdrop has really lingered since ’07 – with the conditions that set all of this up occurring beforehand – it’s probably time to think about what to do about it.
Yes, that means I’m going to look at the inflation/deflation, austerity/stimulus debate.
You’ve been warned…