US$, 5 weeks +/- vis-a-vis 5 yr T-Note
Understanding your question as why Libor is flat and the 5 year T Note moves?
Libor is flattish (although it changed every day somewehre by the low decimals) even longer than 5 weeks. As a matter of fact Libor caused a lot of headaches during the last 8 Month.
I presume you know that Libor are reference rates around which actual underlying flows in Swap & Credit Markets are done on the banks books, and that the biggest maturity is a 12 month; while the T Note is covering 2, 5, 10 years having coupon payments every 6 month.
Anyway, actual borrowing rarely took place at those rates - even as a good name sometimes you paid a premium up to 30 bps for getting such money.
However a reason could be;
1)
Centralbanks are still a deciding factor in steering (not only deciding upon) monetary policies; some of them are conducting it through daily market operations (FED, SNB) thus allowing bigger intraday or even intra month activity.
Others (ECB f.e) keep short term volatility low, letting it move on the longer ones.
2)
In "normal" times Libor rates are flattish as long a Centralbank doesn't act.
Now, while the USD Libor is a reference rate fixed in London by the panel banks the T Notes is a paper issued directly by the US Government to seek money, reshuffle debts etc - thus by various methods issued with a price and then until it matures freely tradeable. (All IIRC)
Hope I was able to cope with your question and my english was not too messy,
ciaoaoao
Libor is flattish (although it changed every day somewehre by the low decimals) even longer than 5 weeks. As a matter of fact Libor caused a lot of headaches during the last 8 Month.
I presume you know that Libor are reference rates around which actual underlying flows in Swap & Credit Markets are done on the banks books, and that the biggest maturity is a 12 month; while the T Note is covering 2, 5, 10 years having coupon payments every 6 month.
Anyway, actual borrowing rarely took place at those rates - even as a good name sometimes you paid a premium up to 30 bps for getting such money.
However a reason could be;
1)
Centralbanks are still a deciding factor in steering (not only deciding upon) monetary policies; some of them are conducting it through daily market operations (FED, SNB) thus allowing bigger intraday or even intra month activity.
Others (ECB f.e) keep short term volatility low, letting it move on the longer ones.
2)
In "normal" times Libor rates are flattish as long a Centralbank doesn't act.
Now, while the USD Libor is a reference rate fixed in London by the panel banks the T Notes is a paper issued directly by the US Government to seek money, reshuffle debts etc - thus by various methods issued with a price and then until it matures freely tradeable. (All IIRC)
Hope I was able to cope with your question and my english was not too messy,
ciaoaoao
Thank you very much. Your English is fine.
I am familiar with what you say...and certainly the mechanics..what I'm striving for is a rationale, a basis with which to understand the correlation, between LIBOR and other interest instruments..surely, swaps are going to parallel the underlying instrument to which they are tied , but the flatness in LIBOR, particularly from March through August of 2007, had no corresponding pattern in other interest rate setting vehicles, and that scenario appears to be currently repeating. While the terms of other instrument, i.e., bills, notes, bonds, are obviously disparate, discounts and premiums can automatically adjust for that. I guess it comes down to this: Am I to believe that member banks are simply not interacting to a degree that would affect the rate as would normally be expected? Ergo, there is limited liquidity or simply a reluctance to lend.
Thanks again for your consideration.
andanotherthing
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Banks are not interacting in a normal fashion. In Spain for example according to their deputy governor this morning the spanish banks are borrowing up to 47bn euros from the ECB because that cash is just not available to them in the interbank market at the moment, this is triple their normal levels. There used to be a liquid cash mkt but now liquidity is rare beyond 3 mth borrowing. the relationship between Libor and the underlying market has been stressed to the extreme by the ongoing credit mumble. The ECB expects tensions in money markets to remain until 2009.
Yep (adressed to martcan),
Well, talking about CHF we had moves of 1% in O/N rates within a 3 weeks (back in March IIRC); as far as I know the Fed has daily lows/highs in repo auctions of/ about 1/2%++.
As mentioned (and you do see it quiet correctly); capital or even Money Market instruments are issued at a price but they are traded.
Borrowing/ Lending Money has not only to do with a price, but it's also about Counterparty limits (it's apaling to see "top" banks cutting each others throat regarding that).
The Libor, this is my silly and unqualified opinion, was/ is abused to show that nobody has problems - as a panel bank as to comunicate the respective rate where it were borrowing in the market, prior to 11 am. Maturities for the fixing day are known within every bank, Libor by definition is starting spot, so rarely any surprise in miscalculating the needs. I do understand/ believe the BBA that they never expect and never would point towards such a barbaric misuse
Personally I tend to say there is enough liquidity in the system so far, but the distribution is not shopping center style anymore.
For correlations I would take down longer stuff to their cash value and put it against daily repo rates....though not too sure it makes sense at the end (models etc).
Well, talking about CHF we had moves of 1% in O/N rates within a 3 weeks (back in March IIRC); as far as I know the Fed has daily lows/highs in repo auctions of/ about 1/2%++.
As mentioned (and you do see it quiet correctly); capital or even Money Market instruments are issued at a price but they are traded.
Borrowing/ Lending Money has not only to do with a price, but it's also about Counterparty limits (it's apaling to see "top" banks cutting each others throat regarding that).
The Libor, this is my silly and unqualified opinion, was/ is abused to show that nobody has problems - as a panel bank as to comunicate the respective rate where it were borrowing in the market, prior to 11 am. Maturities for the fixing day are known within every bank, Libor by definition is starting spot, so rarely any surprise in miscalculating the needs. I do understand/ believe the BBA that they never expect and never would point towards such a barbaric misuse
Personally I tend to say there is enough liquidity in the system so far, but the distribution is not shopping center style anymore.
For correlations I would take down longer stuff to their cash value and put it against daily repo rates....though not too sure it makes sense at the end (models etc).
Given the massive amounts of capital injected into the US banking system by the Fed, not to mention opening the discount window to non-members and sovereign funds buying huge chunks of equity to shore up regulatory reserve capital...Spain's move is not surprising. However, none of this actually bears on LIBOR, arguably the western world's most utilized rate in determining commercial loans and real estate mortgages, on the contrary...we still have inordinate volatility in rates and spread margins but LIBOR, for intents, remains flat. Why?
Thanks for your response.
Yep (adressed to martcan),
Well, talking about CHF we had moves of 1% in O/N rates within a 3 weeks (back in March IIRC); as far as I know the Fed has daily lows/highs in repo auctions of/ about 1/2%++.
As mentioned (and you do see it quiet correctly); capital or even Money Market instruments are issued at a price but they are traded.
Borrowing/ Lending Money has not only to do with a price, but it's also about Counterparty limits (it's apaling to see "top" banks cutting each others throat regarding that).
The Libor, this is my silly and unqualified opinion, was/ is abused to show that nobody has problems - as a panel bank as to comunicate the respective rate where it were borrowing in the market, prior to 11 am. Maturities for the fixing day are known within every bank, Libor by definition is starting spot, so rarely any surprise in miscalculating the needs. I do understand/ believe the BBA that they never expect and never would point towards such a barbaric misuse
Personally I tend to say there is enough liquidity in the system so far, but the distribution is not shopping center style anymore.
For correlations I would take down longer stuff to their cash value and put it against daily repo rates....though not too sure it makes sense at the end (models etc).
Would anyone share my thought that those BBA members reporting their lending/borrowing rates for the US$...and setting the rates, might, fudge on their quotes, perhaps in concert or reception of direction, by the US Fed and Treasury Dept.?
Margins; today every contract for credit facilities/ mortgages is still mentioning LIBOR; but the margin will be higher. Many employees the banks will sack are not those sub prime cracks (they already done); it's the rep office people giving the credits out with to little margin.
No. Might well be it's not done too seriously from many banks, but everything comes down to the short dates at the end; and thats why centralbanks are steering through daily repo actions and not Libor operations.
The thing I feel a bit obsolete as the stiff upper lip (to face misfortune bravely and resolutely
) and not communicate pro actively that the reference is a bit out of shape currently.
