US 3-DOLLAR INTERBANK RATES INDICATED AT UPPER END OF 3.7-4.8 PCT RANGE IN EARLY LONDON TRADE.
Despite a $30bn repo auction to be held by the BoE today.
If dollar Libor spreads blow out to that level, it will be a truly incredible move. We’re on the point of running out of adjectives - yesterday’s move in the Libor OIS spread was incredible too.
It looks like central banks are worried that the only thing keeping banks up now is the fragile commercial paper market, which banks have been desperately tapping in the past few days as a source of overnight funding.
Liquidity is being thrown at the system, but it’s just making things worse.
By pumping in more money central banks aren’t addressing the fundamental concerns of the banks at all. Going cold turkey is a very unpleasant thing, but the solution isn’t more drugs, even if they alleviate short term pain.
In assuming they can rely on central bank money market operations - which will be expanded (as is the case) when the going gets tough - banks are naturally avoiding lending to each other.
Collapses like WaMu don’t exactly help either.
