The Truth Shall Set You Free!

April 16th, 2008 9:32 am | by John Jansen |

 I have been a frequenter poster on the money markets lately. I have related the thoughts of a money market trader at a large shop who has been modestly constructive on his market. The story in the Wall Street Journal this morning which suggetst that banks have been understating the true cost of funding and the true Libor rate has turned this veteran trader less optimisitic. My source believes that this story and the subsequent report that the British Bankers Association will mete out harsh punishment to those found dealing in untruths will lead to an excess of caution over the near term. My trader source reports that inquiry further out on the money market curve has dried up this morning and the only business he has printed is in overnight sector. He thinks the imbroglio could add 5 basis points to 10 basis points to Libor in the near term

Separately, the 5year swap spread is currrently at 92.5 basis points. It has essentially retraced the entire post Bear Stearns rally. On the Friday evening of March 14 the 5 year swap spread finished trading at the 93.75 level. In the rally which followed it reached 77 basis points. It has slowly moved wider so that it currently sits just a basis point from the pre Bear level.

Be Sociable, Share!
  1. 8 Responses to “The Truth Shall Set You Free!”

  2. By Paul on Apr 16, 2008 | Reply

    Did your trader source have any opinion about whether the BBA’s concerns were valid ? Was his source of concern more that the validity of LIBOR had been compromised or that the BBA’s warning will cause overly conservative behavior going forwards ?

  3. By S on Apr 16, 2008 | Reply

    could you give us FI neophytes a quick once over as to why the swap spreads are sop important as an indicator

  4. By John Jansen on Apr 16, 2008 | Reply

    S
    How about a succinct answer. Swap spreads are analogous to taking your temperature when you are sick. When the fever hits 102 you may not know the exact nature of the problem but you know that something is out of kilter .
    That ,I think works here,too. The widening of swap spreads is a measure of stress in the system of availability of credit for high grade financial name borrowers.

  5. By John Jansen on Apr 16, 2008 | Reply

    I was discussing the swap spread market and Libor rate story with a former colleague and he had a colorful analogy.
    He made the salient point that the Federal Reserve has lent its balance sheet to dealers and is taking back all sorts of execrable and merdurinous collateral and allowing the dealers to provide a mark to market valuation.
    My former colleague suggests that if the situation has deteriorated to the point that the Fed feels compelled to provide that type of lenient financing,then why would any one bank or investment bank be enthusiastic about lending to another. The colorful analogy begins here if you wish to send the children out of the room.

    He suggests that it is as if the Fed has lifted up the skirts of the dealers and now wants us to forget what we saw!!

    Lenders cant forget and that is why the Fed Funds Libor spread is so wide.

  6. By British Bankers' Association on Apr 17, 2008 | Reply

    The BBA will ensure that dollar BBA LIBOR continues to be a transparent, objective, accurate rate.

    The economic conditions are difficult especially in the lending and credit markets. In response the BBA has brought forward the regular review of the BBA LIBOR setting process. This review is currently underway and the BBA will report on its findings in due course.

    BBA LIBOR is overseen by an independent committee that oversees the rates. This committee has absolute authority to select the panel bank membership.”

  7. By British Bankers' Association on Apr 17, 2008 | Reply

    The BBA will ensure that dollar BBA LIBOR continues to be a transparent, objective, accurate rate.

    The economic conditions are difficult especially in the lending and credit markets. In response the BBA has brought forward the regular review of the BBA LIBOR setting process. This review is currently underway and the BBA will report on its findings in due course.

    BBA LIBOR is overseen by an independent committee that oversees the rates. This committee has absolute authority to select the panel bank membership.

  8. By Richard on Apr 17, 2008 | Reply

    The BBA announcement that it will meet out harsh punishment to those found dealing in untruths is quite Orwellian, like something out of the George Orwell Book 1984.

    I content that indeed, both the Libor and the credit default swaps, CDS, will serve as ongoing investment landmarks and tools.

  1. 1 Trackback(s)

  2. Sep 7, 2010: Summer Rerun: Why the Happy Talk About the Credit Crisis? « naked capitalism

Post a Comment