Wednesday, March 11, 2009

Libor revisited

By Sam Jones on FT Alphaville:

It’s been a while since anyone really paid much attention to Libor.

Back in September, when Lehman failed, the daily Libor numbers from the BBA were anticipated with a rather grim hawkishness. Now though, they’ve rather fallen off the radar.

The key measure was ever the Libor-OIS spread: the difference between the interbank rate and the market’s expectation of central bank rates. In other words, a fairly good proxy for pure credit risk.

Concerted action from the major central banks of the world brought that spread in considerably after it shot for the moon in September. That “thawing”, along with a lot of clatter about Libor’s technical unreliability in general, led people to move on to pastures new.

But the Libor-OIS spread never came back to earth completely. Indeed, take a look at the below graph (click to enlarge):

Libor-OIS graph

Notwithstanding the Lehman-peak, Libor-OIS appears to be following a new secular trend: a seemingly ineluctable slow creep upward.

More to the point, it’s still dramatically elevated compared to where it was two years ago, when nary a sniff of a credit crisis was on the breeze. In fact, it’s even above the level it was when the first wave hit - a level that at the time was considered dramatic in its own right (a nine-sigma event, no less).

It’s a changed world.

1 comment:

Kiers said...

spread still elevated because what's off balance sheet is not ON yet! nobody knows. CBS mentioned that Morgan stanley alone, has over 150 offshore subsidiaries registered in Cayman alone!!

Is it any wonder about Libor-OIS!
Bloody bankers don't trust themselves, but united, they ask for more and more bailouts~!