Overnight-Lending Markets Still Flashing Red


Posted by Editor
September 30, 2008
Min Zeng and Mark Gongloff report.


http://blogs.wsj.com/marketbeat/2008...-flashing-red/


If you only watch the stock market, where the Dow was recently up more than 250 points, you might get the mistaken impression all is well with the world on the Tuesday after the latest Black Monday.


But, as has often been the case during this crisis, credit markets are singing a different tune. Overnight dollar Libor rates more than doubled to 6.875%, as banks hoarded cash for the quarter end amid signs the financial crisis was spreading. It’s more than a little ironic that while investors are buying banks’ stocks — shares were up sharply across the sector — banks themselves were unwilling to buy each others’ shortest term debt.


Banks are so desperate for funds that they paid 11% for $30 billion in overnight funds from the European Central Bank, up from 3% just Monday.


Sure, a second round of dollars from the ECB and a 28-day injection of funds from the Fed helped calm the worst panic (indeed, the ECB’s $50 billion offer drew just a bit more than $30 billion in bids, and the rate fell back to 0.50%; while fed funds are now trading at 3.0% rather than the 7.0% high we saw them at earlier), but we’re a long way from normal.


Lena Komileva, economist at broker Tullet Prebon, notes the premium for overnight liquidity is “out of control,” making it hard for central banks to instill confidence in the future.


In short, credit is frozen, in part because institutions are hoarding liquidity for the end of the quarter.


Monday’s Epic Fail on Capitol Hill would seem to be hurting too — except credit was worsening even before the $700 billion bailout bill died, notes Brian Reynolds, chief market strategist at WJB Capital.


Need more geeky proof just how little trust is around? The three-month Libor/OIS spread — which compares the rate at which banks are prepared to lend to each other to the expected benchmark interest rate set by the Fed — widened to a record 246.75 basis points from around 218 basis points Monday.


And it isn’t just Wall Street. The commercial paper market, where companies raise short-term financing, also felt the pressure of tightening conditions. One trader at a primary dealer said volumes are holding up around Monday’s levels, but overnight rates on asset-backed commercial paper jumped to 6% to 7.5% from 2% for better-rated companies on Monday.


It isn’t helping that today is the last day of the third quarter, bringing banks’ efforts to get their books in order to a head.

_________________________________________________________________

Another Poll on CNN.

'What should Congress do now that the bailout bill has been defeated in the House?'

1) Draft a new rescue plan-------------------41%---------77106

2) Let risk-taking financial institutions fail--59%---------110245


Total Votes: 187351

http://www.cnn.com