The Libor's biggest drop fails to spur loans

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The London interbank offered rate, or Libor, for three- month loans fell to 2.51 percent today, from 4.82 percent on Oct. 10.

Even Central banks have driven money-market rates lower by offering financial institutions as much dollar funding as they need and acting in concert to slash interest rates. But the rate is still 151 basis points more than the Federal Reserve's target interest rate for overnight bank loans, compared with an average of 22 basis points in the five years before the global credit crisis began in August 2007.

While the difference between Libor and the overnight indexed swap rate, a measure former Fed Chairman Alan Greenspan uses to gauge the state of money markets, was at 192 basis points today. That compares with 87 basis points on the last day before Lehman's collapse and an average 11 basis points in the five years before the crisis started.

The TED spread is still high because banks are cutting back, the economy is in a deepening recession and in that environment, banks may be not going to become a lot more willing to extend credit soon. Banks may not pass all of the benefits of lower interest rates on to consumers and businesses. Banks around the world are re-evaluating the price they put on risk, raising the cost of loans when compared with levels of pervious years. Credit has to be priced appropriately to reflect the risk. If interest rates are brought down significantly, then rates for borrowers will come down. It’s not absolutely linear because it depends on the particular transaction and the risk.


ETFs/Stocks :

SPDR Lehman 1-3 Month T-Bill ETF (BIL)
SPDR Lehman International Treasury Bond ETF (BWX)
iShares Lehman Short Treasury Bond Fund (SHV)
ProShares UltraShort Lehman 20+ Year Treasury Bond ETF (TBT)
ProShares UltraShort Lehman 7-10 Year Treasury Bond ETF (PST)

Related Posts :

Dollar Libor Drops 17th Consecutive Day

Sources :

Bloomberg: Libor's Biggest Drop Fails to Match Fed, Spur Loans (Update3), November 5, 2008 06:42 EST

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