While credit conditions have improved slightly, we are very far from getting credit markets flowing again. We’ll know that the lending strike is over when yields on Treasuries rise, meaning people are not buying up government debt in hopes of earning a paltry return while not taking on risk, and Libor falls, meaning banks are lending to each other at less than panic pricing. Today we saw half of that: Libor fell but so did Treasury yeilds. Unfortunately, Libor is fixed in the morning and Treasuries trade all day. Which means that things got worse as the day wore on.
Three-month U.S. dollar Libor droped to 4.55% at today’s morning fix, which is a decline from yesterday’s 4.635%. The yield on three-month Treasury bills rose early in the day before sinking back down to around 0.22%, lower than yesterday’s close. The Ted Spread, the difference between inter-bank borrowing and borrowing from the Fed, contracted a bit to 4.37, but this was probably because Libor was fixed before things got really ugly today.
Risk premiums on agency debt lately widened to record levels. The CDS market took off on a tear. Whatever the TARP, the CPP and the various guarantees were supposed to do, they weren’t doing it today.
Earlier: Sorry Hank, Bailout Isn’t Working