Tags: libor | credit | panic

Libor Plummets, Credit Panic Close to Done

By Dan Weil   |   Thursday, 21 May 2009 09:57 AM

The London interbank offered rate (Libor) has just experienced its biggest two-day drop in four months, another sign that credit markets are healing.

Libor is the rate at which banks lend dollars to each other. The lower the rate, the more comfortable banks feel about lending money to their brethren.

Three-month Libor dipped seven basis points for the Monday-Tuesday period to 0.75 percent. That’s the biggest two-day decline since Jan. 13. The rate has fallen in each of the last 35 days.

By Thursday it had fallen to 0.72 percent.

“The tension has disappeared, and we are gradually normalizing,” Patrick Jacq, a senior fixed-income strategist at BNP Paribas, tells Bloomberg.

“There’s less stress in the market, and banks know they will get liquidity.”

Market conditions clearly have benefited from monetary easing around the globe. The Federal Reserve alone has committed to inject $12.8 trillion of liquidity through various programs to unfreeze the credit markets.

The Fed in its most recent minutes revealed that some members wanted to do even more buying of Treasury debts, which has helped set off a selling spree on world markets.

The key Libor-OIS spread, which also shows how willing banks are to lend, has slid to 55 basis points, its lowest level in almost 15 months.

That spread may shrink to 25 basis points in the “next few weeks,” Ivan Comerma of Banc Internacional d’Andorra tells Bloomberg.

Former Fed Chairman Alan Greenspan said last June that money markets can’t be considered “normal” until the spread reaches that level.

Another sign of credit market improvement: research firm Dealogic tells The Wall Street Journal investment-grade bond issuance is on pace for the best year since it started compiling data in 1995.

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