LIBOR continues its drop

Another day closer to the release of the bank ‘stress test’ brings us
another leak in the morning papers and today reveals that 10 of the 19
banks MAY need to raise capital and/or convert preferred to common in
order to improve the TCE ratio. The relevance of the outcome is only
important for those specific banks and their stakeholders as the US govt
will not let another Lehman occur with those tested. As part of this
implied govt guarantee, LIBOR rates continue to drop as US$ 3 mo fell
for a 25th straight day and is now below 1% and the TED spread is at the
lowest level since June ’08 but in a sign that banks are still reluctant
to lend to each other for any period of time other than very short term,
the spread between 1 mo LIBOR and 3 mo LIBOR is still elevated at 59 bps
vs around 10 bps in calmer times. The $ index is at a 6 week low as the
fear trade unwinds and any improvement to global growth will be more
pronounced outside of the US.

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