You are probably familiar with parallels between current money market stress and that experienced post the collapse of Lehman Brothers in 2008.
But there’s a key difference, as highlighted by the fixed income analysts at Deutsche Bank. In 2008, money market strains manifested themselves in a cash shift — spot dollar Libor-OIS spreads moved first.
During 2010 money market turmoil — which is still nowhere near Lehman-highs but had intensified in recent weeks — it’s the forwards which are moving the most. In chart form:
And in words:
The stress indicators are still far from the post-Lehman crisis. During Q408/Q109, the move in these indicators was led by cash, eventually spilling over to the futures as markets started pricing in an extended period of funding related issues. However, currently the move appears to be led by forwards rather than cash suggesting a front running of moves.
We’re sure that’s meant to be comforting but, err, someone seems to be placing bets on greater money market stress. Time will tell if they’re right of course. But in the meantime, Deutsche say there’s not much chance of Lehman-like difficulties. There are too many liquidity programmes in place.
Watch out for July 1st though:
With the ECB unlimited allotment 3M tender facilities in place (and the possibility of 6M tenders to be reintroduced if need be), liquidity risks for European banks should remain at manageable levels. The expiry of the 1Y tender (EUR 442bn) on the 1st of July presents a pressure point for the financial sector.
However, note that the expiry of the 1Y tender coincides with the settlement of a 3M and a 1W tender, which should address rollover risks. Of particular concern has been the issue of USD funding for European banks as access to the USD CP market could become constrained. Currently, potential avenues for European Banks for USD funding are the US CP market, ECB USD swap facility or swapping their euro funding into dollars via the fx market.
If conditions were to deteriorate significantly, assuming a worst case scenario of no access to the CP market. non- US banks and other foreign entities would need to fund approximately $200bn through other avenues . . . While access to market dollar funding could get constrained, particularly for weak banks, the main saving grace is the ECB 1W USD swap facility. The take up at this week’s tender was slightly over EUR 5bn while the last 84day tender had a take up of EUR 1.04bn. The limited take-up at these auctions suggests that stress levels in the funding market are, as of yet, not at critical levels . . .
Related links:
Onwards, upwards, forever, European liquidity – FT Alphaville
Those Libor laments in context – FT Alphaville
‘Heightened levels of interbank funding could be with us for some time’ – FT Alphaville
LTROpprobrium – FT Alphaville