Money Market Update
October 14th, 2008 9:15 am | by John Jansen |The money market trader with whom I converse regularly is optimistic about the actions taken by the authorities to restore confidence to the financial markets. He thinks that they are taking almost every conceivable action possible to jump start the market. It is his opinion that these actions will work and will over time serve to return the money markets to a semblance of normality. Rates and spreads should fall in tandem.He noted that activity this morning has been confined to the overnight market once again. There is very little trading thus far in the term markets.
He surmises that investors are studying the details of this multi faceted plan and that once the details are understood investors will jump back in to the term markets to lock in the higher rates.
One Response to “Money Market Update”
By E-man on Oct 14, 2008 | Reply
What your money market trader makes sense. After reading and re-reading the FDIC guarantee, I do not see how overnight LIBOR, 1-week LIBOR, and 2-week LIBOR won’t immediately go to Fed-funds + epsilon tomorrow.
This seems like the classic definition of arbitrage: take your $1 of capital out of treasuries, deposit it for 2 weeks (e.g., via buying commercial paper) at an insured bank and collect the 300+ basis point spread with exactly the same risk as treasuries.
Any thoughts on what could make LIBOR/Fed-funds spreads persist despite this guarantee?