Stock rally is fading fast here, but credit rally is still in full swing. This makes total sense to me, as the government's maneuvers mean more in terms of survival than thriving profit growth.
CDS and swap spreads on most names remain at their tights for the day. LQD, the corporate bond ETF is up 1% today after gaining 5% yesterday. Note that the actual bond market was closed on Monday.
For what it's worth, the euro-dollar futures market, which essentially is a traded market on LIBOR predicts the 3-month rate will fall from 4.63 to 3.99% tomorrow.
Tuesday, October 14, 2008
Fading fast
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But if the government is guaranteeing interbank lending, shouldn't LIBOR come down much more (e.g., close to Fed Funds?). It seems like there should be an arbitrage between Fed Funds and overnight LIBOR (for the next 30 days, both will be overnight rates guaranteed by the US government).
For longer terms, the 75 basis point insurance fee might put a wedge between LIBOR and Fed Funds, but it seems like rates are much further apart than that right now.
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