Tuesday, October 14, 2008
watching for progress
early returns in the interbank lending market are very modest -- per yves smith and felix salmon.
john jansen's contact in money markets is optimistic, but notes no term lending is taking place today.
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.
it mystifies me as to why term lending would reappear when central bank liquidity on offer is essentially limitless at the moment. but it doesn't have to make sense to me if it happens.
UPDATE: david merkel suggests watching yields more than spreads. for example, the TED spread (between 3-month LIBOR and same duration T-bill yield) can contract by LIBOR staying steady and T-bill yields spiking. the result is that spread contracts but real borrowing cost grows somewhat worse. and that is in fact what is happening today.
UPDATE: more from yves smith:
“The fact that the boldest banking guarantee in history was not worth more . . . raised some eyebrows,” said Christoph Rieger, analyst at Dresdner Kleinwort.