THE BASIS POINT

Why Do Short-Term Rates Matter: Roundup of LIBOR and TED Spread Stories

With short term rates spiking, there’s been lots of coverage about this topic this week. Below are some stories about why short term rates are spiking, including a couple good stories explaining what the TED spread is and why it’s important.

Econobrowser: Understanding the TED Spread: This is a great (and brief) primer on the TED spread which is the difference between 3mo LIBOR and 3mo T-Bills, and serves as an indicator of the bank sector’s willingness to lend to one another. His most interesting point:

TED is the spread between three-month Libor and three-month Treasuries. Three-month Treasuries are a classic flight-to-quality buy: the place you go to when you want to just hide out in a cave and not get eaten by a marauding bear. Three-month Libor, on the other hand, is the rate at which banks will lend out their precious capital to another bank for a full 90 days: an eternity, in this market.

More to the point, if you’re a bank, you really neither want nor need three-month interbank funding right now. Global central banks, led by the Federal Reserve, have flooded the system with so much overnight liquidity that you can get as much cash as you need, at a much lower interest rate, directly from your central bank, overnight. The choice between that and locking in a high interest rate for three months is a no-brainer.

Does The TED Spread Really Matter?: This is from Portfolio.com’s Felix Simon, and is another great primer on the TED spread and why short-term interest rates matter in the current credit crisis.

This report from Financial Times pretty much sums up the short-term rate situation:

The spike in overnight dollar has come down – but it’s still extremely elevated. Other Libor readings show little sign of improvement, and in some cases worsening conditions. All the more alarming given the desperate unprecedented money market operations being undertaken by central banks currently.

Overnight USD Libor Fixed At 3.78375% vs 6.87500%

Overnight Sterling Libor Fixed At 4.9625% vs 6.78%

Overnight Euro Libor Fixed At 4.26875% vs 4. 44875%

Three month USD Libor Fixed At 4.15000% vs 4.05250

Three month Sterling Libor Fixed At 6.30750% vs 6.3%

Three month Euro Libor Fixed At 5.28500% vs 5.27375%

RGE Monitor: Global Money Markets, Interbank and TED Spreads-Extreme Stress: This is a broad roundup of the situation, and perhaps most poignant is this excerpt:

UBS analyst: “There’s no real term funding markets except for central banks. The Libor is meaningless. It’s for unsecured lending and there is no unsecured lending as far as I can see.” (Bloomberg)–> ECB auction of three-month loans was the strongest on record, while banks paid a record premium for dollar loans at Sep 23 Fed sale.