"The money markets have completely broken down, with no trading taking
place at all. There is no market any more. Central
banks are the only providers of cash to the market, no-one else is
-Christoph Rieger, a fixed- income strategist,
The London interbank offered rate reached an all time high yesterday on the failure of the bailout plan, and the market sell off. For those of you new to the site, this interest rate is frequently used by banks to lend money to each other. When this spikes, it means that credit is very tight.
What did the Fixed Income Markets see that the Equity markets completely missed? Was it availability of credit, the dollar, or unrealized risk?
Most likely, all of the above.
Note that the line below is where LIBOR first started breaking out — late 2005. For those of you who believe that markets are future discounting mechanisms, what did that tell you?
Sure, markets remained irrational for quite a while, but there was no escaping the inevitable . . .
Chart via Bloomberg
TED Spread Chart since 1984
via Bill Laggner Bearing Asset.com
"The cost of borrowing in dollars overnight surged the most on record after the U.S. Congress rejected a $700 billion bank rescue plan, heightening concern more institutions will fail.
The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent today, the British Bankers’ Association said. The euro interbank offered rate, or Euribor, for one-month loans climbed to record 5.05 percent, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, advanced to a record. Rates in Asia also rose…
Credit markets have seized up, tipping lenders toward insolvency and forcing U.S. and European governments to rescue five banks in the past two days, including Dexia SA, the world’s biggest lender to local governments, and Wachovia Corp. Money- market rates climbed even after the Federal Reserve yesterday more than doubled the size of its dollar-swap line with foreign central banks to $620 billion. Banks borrowed dollars from the ECB at almost six times the Fed’s benchmark interest rate today."
Libor Surges Most on Record After U.S. Congress Rejects Bailout
Gavin Finch and David Yong
Bloomberg, Sept. 30 2008