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Thursday, April 24, 2008

RISE Dark Lord Libor! RISE!

RISE Dark Lord Libor! RISE!

Libor to Rise as Banks Stay Wary, Derivatives Signal (Update1): “Interest-rate derivatives are signaling that the rate banks charge for loans in dollars in London may rise further as financial institutions remain reluctant to lend.

The difference between the rate of three-month loans in London relative to the overnight index swap rate, known as the Libor-OIS spread, is 89 basis points, just below the year high of 90 basis points reached on April 21.

The London interbank offered rate, or Libor, for dollars climbed to a seven-week high amid speculation the global credit crunch prompted lenders to manipulate the rate to prevent their borrowing costs from escalating. The British Bankers' Association said last week it will speed up a review of the process by which money-market rates are set daily and ban any member providing misleading quotes.”

Despite every attempt to bring Libor down, the banks continue to both hoard and need cash. The Fed, in all its brilliance, is offering to do more of the same.

“The persistence of banks' need for cash and increase in Libor rates has triggered speculation that the Federal Reserve will increase, for the third time, the amount it loans through its Term Auction Facility, which is known as TAF. The Fed has auctioned a total of $360 billion in temporary funds through TAF since its debut in December. This month, both TAF auctions were for $50 billion each in 28-day loans.

The rate at this week's TAF was 2.87 percent, or 82 basis points above the minimum bid set by the Fed, the highest spread to date. An increase in the spread signals a rise in demand for funds in the banking system.

The TAF auction rate was 3 basis points below one-month Libor for dollars at 2.90 percent, after the prior auction's rate was 10 basis points above one-month Libor, sparking heightened attention on Libor. The rates for a collateralized loan, as are TAF funds, are typically lower than those that are offered without it, as with Libor, given the maturity is the same.”

What the Fed should be doing is emphasizing and enforcing TRANSPARENCY. This it is not. It is because the banks don’t trust each other, and rightly so, that they are feverishly hoarding and refuse to lend to one another. You see, each bank knows its own books and knows the accounting tricks its using, such as tossing bad positions into the Level 3 asset bucket. Knowing just how precariously everything is balanced in house and just how fake all numbers for public consumption are, the banks rightly assume their peers are just as messed up. What you have is a Mexican stand off. Nobody moves. Until the banks can figure out who among them is actually legitimately solvent, Libor will stay elevated.

This also has knock on effects…

“Use of Eurodollar futures, which are based on predictions for Libor rates, as a bet on expected changes in Fed interest- rate policy has waned amid the questions regarding Libor rates, according to Credit Suisse Securities USA LLC, one of the 20 primary dealers that trade directly with the Fed.

Eurodollar futures open interest, or the total number of futures contracts that have not been closed, liquidated, or delivered, declined by 21 percent since the end of January, according to CME Group data. It fell 4.7 percent for the week ended April 18, after the BBA announced it was monitoring banks involved in the Libor process, from the end of the prior week.

Eurodollar futures, which trade in price terms, settle to three-month dollar Libor at expiration. The settlement price is derived by subtracting the Libor rates from 100.”

“Libor uncertainty has led to a large-scale deleveraging in the Eurodollar complex. Over the past week, the decline in open interest has been dramatic as the problems with Libor have become more publicized.” -Dominic Konstam, head of interest-rate strategy at Credit Suisse

We trade Eurodollar (ED) futures here at CFT Financials in a big way. All day, everyday. Some of our traders are complaining loudly. “Where did all the size go?”
Others are loving it. Less competition you see. There are more opportunities as certain moves are now more pronounced because there is nobody there to take the other side. We’ve also noticed a conspicuous reduction in the “Quants”. Maybe blindly running the computers in this credit crunch resulted in some outsized losses. Or maybe there isn’t enough liquidity for these programs now. Either way, quite a few computers aren’t trading anymore.

More importantly, things have gotten WORSE, not better. So this is far from over.

The Eurodollar (XED, candles) contract prices off of Libor (LIBOR, green). We know Libor is elevated and rising (that would be falling on this chart). The market is taking back Bernanke's rate cuts. Since this is happening in the short end of the curve, you won't yet have noticed the effects on the 'real economy'. Wait until mortgage, car loan and credit card rates all start to rise as well...

Since LIBOR is THE determining factor in most floating rate, variable rate, option ARM and any other crazy credit product out there, you know now that rates and rate resets are going to be suddenly and unexpectedly higher in the very near future.

The S&P 500 (SPX, candle) is back at the 'break point' of 1400. The declining 200 day EMA has almost caught up as well. This 1400 area will act as formidable resistance. With the residential real estate market continuing to deflate and with the commercial real estate market yet to deflate... with the consumer completely crippled... with job losses set to accelerate... and with the entire financial system mortally wounded...

ANY pop above 1400 would have to be temporary...

Now for some comic relief:

Ambac May Raise More Capital After Reporting Loss (Update1): “Ambac Financial Group Inc., the bond insurer that raised $1.5 billion last month, may be forced to seek more capital after it lost money for the third straight quarter.”


Monoline Related Posts:
Quiet, Sneaky Little Downgrades: CFC, MBI
Ambac ‘Bailout’: Why Bother?
Ambac Bailout: The Wheels Come Off
Monoline Bailouts: The Great Circle Jerk

Related Posts:
Ambac Gets Crushed, Another Bank Wobbles
Fragile Banks: More Bailouts, More Capital
The Race To The Bottom Accelerates
The South Sea Bubble and Today’s Central Banks: FRB, BOE, ECB
Dammit, Why Won’t You Learn?
The TED Spread, LIBOR and EURIBOR = Scary Bad
Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble


Anonymous said...


I think you nailed it. The markets are taking back the fed's rate cuts. I just don't foresee global investors accepting 1% or 2% rates in a declining currency.

The world followed Greenspan's lead and it didn't work out so well. Fool me once, shame on you. Fool me twice, shame on me.

You get what you deserve, not what you want or need.

Anonymous said...

I just recently reading this stuff about the fed and loans. Do the banks pay back these 28 day loans in the 28 days or only the interest?

Ben Bittrolff said...


They pay it all back.
But the Fed then tends to roll it right back over...

James said...

I trade the curve quite a bit and the size is simply gone from treasuries. I havent seen the ten year trade over a million in a least two months.

Anonymous said...

I actually lend the dollars to foreign banks overnight... rates where back up for a while ~2.7 while fed target of course is 2.25 but in the past two days rates have come down some to ~2.45

Anonymous said...

more like 2.35 today

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