Bloomberg gives today’s sighting on money market conditions. Rates continue to improve but remain at elevated levels:
Money-market rates in London dropped as cash injections by central banks and the prospect of deeper reductions in borrowing costs worldwide showed signs of revitalizing confidence in lending.
The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars fell 5 basis points today to 3.42 percent, its 13th straight decline, according to the British Bankers’ Association. The comparable euro rate slipped 2 basis points to 4.83 percent, the 15th consecutive reduction. Asian rates were lower.
“The strains in money markets are beginning to ease, but only at a glacial pace,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets. “Central banks are flooding the money markets with liquidity and that’s bringing rates down. Banks remain very wary of lending to one another though, and I don’t see that changing anytime soon.’…
Today, the European Central Bank loaned banks $106.6 billion for one week and 103.1 billion euros ($132 billion) for three months.
The three-month dollar Libor has dropped 140 basis points since Oct. 10, when it rose to 4.82 percent, the highest since Dec. 27. The comparable rate for euros lost 56 basis points since Oct. 8, the last time it increased….
The three-month Libor for dollars remains 192 basis points above the Fed’s rate, up from 80 basis points three months ago. The Libor-OIS spread was at 260 basis points today, compared with 87 points before Lehman filed for bankruptcy.
Futures on the Chicago Board of Trade show a 48 percent chance the Fed will lower its target for overnight bank loans today to 0.75 percent from 1.5 percent. The odds were zero a week ago. The rest of the bets are for a half-point reduction.
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The only ‘money market rate’ that matters to me is what I get for my cash when I park it in a MMF. And that’s not improving. Nor will it if the Fed cuts again today, as expected. They wouldn’t dare not cut, would they…?
BOE fin stability report
Chart 2.5 Share of corporate debt accounted for by
businesses with interest payments greater than profits:
2001 = 30%
2002 = 30%
2007 = 27%
2008 = ?
2009 = ?
“I don’t know why she swallowed a fly..”
Thought I'd toss in two things into this financial alchemy puzzle and the evolving theory that hot money is still very much part of this derivative swapping systemic decay.
1. (from today) Oil advanced as much as 9.9 percent on forecasts that the U.S. Federal Reserve will cut rates today to help spur a recovery in the world's biggest fuel-consuming country. China lowered rates today and the European Central Bank may reduce them next week. Prices also rose because the dollar fell the most against the currencies of six major U.S. trading partners since 1998.
2. (from the other day) And so, simultaneously, without a clear trigger, traders piled out of the yen and into stocks. Overlay a graph of yesterday’s moves in the S&P 500, which gained more than 10 per cent, with a graph showing the number of yen to the euro, which rose by more than 11 per cent at one point, and it is hard to tell the difference. Every downtick for the yen was matched by a rise in US stock
http://www.ft.com/cms/s/0/45eca9…? nclick_check=1
Hot money is suddenly making me think Bernanke, helicopters and positive inflation, i.e, The Central Banks seem to be willing to allow currency exchange rates to fall with unified and collective “stealth” intervention, in the form of rate decrease. However, the deflationary ZIRP-like rate decreases which devalue currency seem to have an inverse function of increasing inflationary pressures.
In this hyper-volatile roller coaster VIX ride, these engineer gurus want to take us back to the party days of summer where commodities were un-regulated and out of control in a whipsaw environment of speculative manipulation. The Fed rate cut at this point is obviously symbolic and meaningless for economic stimulation, but it does serve as a priming function to re-boot the speculative commodity bubble and open the door for hot money to get back into the business of stimulating volatility and maintaing global systemic instability.
IMHO, if the ZIRP-linked value of currencies connects the deflationary impacts of depreciation to lower yields, hot money will chase after commodity swaps that are based on nothing but speculation. Hence, we will see inflation increase during this recession and a return visit to stagflation with a nice taste of liquidity trap.
This does go back to the concept that tossing a trillion bucks at a hundred trillion is like sprinkling pennies in front of Buffett and watching him get flattened by a steamroller. While there may be some dancing in the streets today and a huge campaign to turbocharge the amplification of the music, the game of musical chairs and hot potato have yet to be played out.
I suggest re-reading some of The Helicopter Ben Bedtime Stories, of which there are many, and here is one example: “This distinction between inflation that is positive yet too low and deflation is worth exploring for a moment. Although the Federal Reserve does not have an explicit numerical target range for measured inflation, FOMC behavior and rhetoric have suggested to many observers that the Committee does have an implicit preferred range for inflation. Most relevant here, the bottom of that preferred range clearly seems to be a value greater than zero measured inflation, at least 1 percent per year or so.”
Ok, one last story, in case your new to this:
Deflation: Making Sure “It” Doesn’t Happen Here
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm
Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Thanks for the primer DH, yes I’m new at this and appreciate the tutoring.
SB
Yves,
you are missing the point on why the MM is “improving”. Just as an example, most of the recent CP “improvement” was due to the Fed, the very same scenario plays out in the MM.
Banks cannot, and will not compete with the government and the Fed, who became the only game in town, _explicitly underpricing_ all the risks.
The immediate consequence of the above is that the banks will go to areas where the government isn’t there, yet. What happened in Japan is that the Japanese banks started
a yen carry trade. Things to ponder.
While money rates appear to be improving, the devil is in the details. See this story recently posted on Bloomberg regarding Citi and CSFB charging Nestle, Nokia and others LIBOR + a % of CDS swap spread on their loans. Some bigger cos have managed to cap the rates, but this is a DANGEROUS trend! http://www.bloomberg.com/apps/news?pid=20601087&sid=a9lKCXoP46hg&refer=home
http://doomisnigh.blogspot.com/2008/10/brazil-korea-mexico-and-singapore.html
Breaking news 4 countries now have credit from the FED, 30 Billion.
For a while, I’d been expecting a dollar carry trade to be the next act when rates reached these levels. However, judging by the dollar meltup, it’s possible that carry trade has already seen it’s best days.
Without the dollar carry trade, it’s hard to see where they’re going to dig up the next bubble.
RE robertm73 – is the Fed trying to bankrupt our country? How much CDS does Goldman have on US treasuries? Or how short are they? this is crazy! Why should we extend credit to countries who have gone bankrupt in the past when it takes money away from companies here who could use it. Although according to the Fed lately, money is infinite.