November 04, 2008
The credit freeze is thawing somewhat as Dollar Libor Drops 17th Consecutive Day. It is important to keep that move in LIBOR in proper context. Comparing LIBOR to November 2004 is not really a valid comparison. 1-Month Libor should be 10+- basis points to the Fed Funds rate, instead it is sitting 118 basis points above the Fed Funds rate.
Inquiring minds are also noting that the TED Spread, while recovering rapidly is still not back to normal.
Chart courtesy of Bloomberg
Even though conditions are nowhere close to normal, the decline in LIBOR will take a tremendous amount of stress off existing LIBOR based ARMS. Here is a chart of 1-Month LIBOR courtesy of the Money Cafe.
That drop in LIBOR from 4.0% to 2.2% (assuming it holds) will reduce interest on many Pay option ARMs and interest only (LIBOR-based) ARMS by a whopping 1.8% compared to that recent spike. And with massive numbers of ARMs resetting now, that explains why the Fed and Central Bankers in general were scared half to death about that latest upward move in LIBOR.
Should LIBOR continue to drop to historic spreads there is still more relief coming for those in ARMs based loans.
Related Posts :
Sources :
- MISH'S Global Economic Trend Analysis: LIBOR Plunges For 17 Consecutive Day, November 04, 2008
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