The closely-watched Ted Spread, a measure of banking health, widened further today. It’s been a long time since we’ve seen it narrow.
At these levels, we’re still in “safe” territory, but there’s reason to be nervous regardless.
Remember, the LIBOR is derived by subtracting 3-month LIBOR from risk-free, and the rise of LIBOR creates its own complications.
Remember, banks have been making a lot of money borrowing cheap and buying Treasuries.
But if funding costs go up, that trade doesn’t work so well.
Only 23 basis points of daylight separate LIBOR (at 51 bps) from 2-year Treasury notes (at 74 bps). Banks are financing roughly two-thirds of the Treasury deficit, and foreign banks are doing most of that
European banks have massive unrealized losses in government debt markets, and the interbank market freeze is likely to worsen. Whether LIBOR hits the 1.5% level projected by Citibank is beside the point. It only has to creep up to 75 bps for the 2-year-note to get clobbered.
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