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Ice-9 Sightings: [Blank]-OIS Spreads Confirm Liquidity Freeze Spreading
Yesterday we first pointed out the sudden jump in the FRA-OIS spread in both EUR and US terms, as the preliminary glimmers of a liquidity crisis are starting to manifest themselves in ultra short-term funding markets. While we will keep an eye on this spread which we expect to continue blowing out slowly until it eventually blows out very fast, earlier today all eyes were on the LIBOR-OIS. Which we are confused by: by now there is not one market participant who thinks LIBOR is even a remotely non-manipulated metric by the BBA member banks (and whatever happened with all those Libor manipulation lawsuits?). In a nutshell one can indicate LIBOR is any number between 0 and infinity and it would have virtually no implications since virtually nobody funds using LIBOR anymore. Which is why we were shocked to learn that someone, in this Central Bank funded world, still uses interbank liquidity. This in turn leads us to conclude that adverse liquidity conditions, while not even remotely scaled to where they were in the Lehman days, are started to get truly ugly behind the scenes. The note below summarizes why traders are once again acutely focusing on liquidity conditions, which in turn are driving up risk prices. If... when Greece defaults, look for all appropriate liquidity spread indicator to blow out to levels far wider than those seen during the Lehman crisis, as the terminal Ice-9ing of the system finally sets in.
What's going on in the Libor markets?
3-month Libor is expected to set higher tomorrow based on European Sovereign risks related to Greece today. 3-month Libor set at 0.245% today and is expected to set higher to 0.24875% tomorrow. To people unfamiliar with this market, this move higher in the Libor rate tomorrow may seem small but it is akin to the possibility of a butterfly flapping its wings in one location but creating a hurricane in another. Right or wrong, that is the way risk markets are extrapolating this move in Libor.
One of the primary signposts of systemic risk is the Libor-OIS spread (see Charts below). This is the spread between 3-month Libor and the average Fed Funds rate over the period. This spread has sharply moved wider toady and risky asset markets seem to be keying off this move (VIX Index is now above 20). Here is what is happening in 3-month Libor-OIS spreads:
3-month Libor-OIS from Jan 1, 2011 - Present
But putting this spread widening of 3-month Libor-OIS into context, below is a longer-term view
3-Month Libor-OIS Spread: since June 2008
As one can see, this Libor-OIS spread is very far away from the crisis levels seen in 2008 and still quite far away from the European Sovereign crisis levels. However, the market is extrapolating the potential rise in Libor, from very low levels, into a potentially bigger risk event. It is hard to say what the future holds but the Libor-OIS spread will be primary measure of systemic risk to monitor.
Key Take-Away: All eyes will be on where Libor sets tomorrow. This will be an important thing to watch as it will set the tone of risk in the markets.
Libor was fixed at 0.247%. Key word being "fixed" - as always LIBOR, in our humble opinion, is an utterly irrelevant metric proferred to the market by the troubled banks themselves who hardly have an interest in indicating just how bad their funding situation is. Which is why watch those FRA-OIS CIX screens very closely: that spread can not be manipulated.
h/t D.H.
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Ice 9, yes, that is a good analogy.
Our politicians would fit in perfectly with the cats cradle cast
interesting how insolvency and continuously bad business practices, lead to a lack of liquidity
um...Ice9?
please esplane mang
From a Kurt Vonnegut story. A special crystalline state of ice that almost instantly catalyses all other water to freeze.
http://en.wikipedia.org/wiki/Ice-9
Incidentally prion diseases seem to behave a bit like this.
Also an excellent Satch tune...
http://www.youtube.com/watch?v=4vqJCOO5im4
Also an excellent satch pedal.
+1 Vonnegut ref
Yes and maybe the Euro zone will soon be Schlacthof Funf. (sp.?)
Also, Ice-9 is very close to Ice-land. Hahahaha.
Never was into Kurt Vonnegut, personally. Too dark and not enough SF for me. Vonnegut was a socialist and an aethist, both of which reflect our current "leadership".
But kudo's on the Ice-9 reference.
Socialist and atheist? What's wrong with that?
Administer more QE, nurse Ratched.
And guess what that means for stocks (think VIX pushing 25+)
"Which we are confused by: by now there is not one market participant who thinks LIBOR is even a remotely non-manipulated metric by the BBA member banks"
Anyone with any large amont of debt and any sense has locked in their rate. Overnight market participants in LIBOR based funding aren't thinking. Only reacting. Only hoping.
See the cat? See the cradle?
All I see is a Player Piano.
Amongst flying chairs !
No cat, and no cradle.
Market participants aren't thinking. Only reacting. Only hoping.
Any company that hasn't locked in rate by now is nuts (other than overnight needs.) Equally the case for any company that hasn't raised enough cash to survive a breakdown in the overnight markets.
I would think GE and many others would be in the same position they were in back in 2008.
Double post, kind of. Sorry.
But you already know they have not... right?
Yup. Harley Davidson was the winner of weirdest bailout last time. Wonder who it will be this time? Starbucks? Dunkin' Donuts?
To your point, most companies that have all this cash are just scared to death about another liquidity crisis and for good reason. These idiots who keep looking for a big M&A wave are on crack.
Your right. Correct in all its nastiness. There has been much talk about the 'strength' of US corporate balance sheets. I personally believe they are leveraged into a different risk model. The rebound of the consumer. US corporates are banking on more spending by US consumers. It is 70% or so of the 'economy'. What happens if they just stop spending?
Many of these companies have lent money to their customers to keep them spending. What happens when they CANT pay. Fun stuff.
What happens? They will mark their vendor financing loans to fantasy and carry on regardless. For as long a time period as they have enough cash to pay their bills.
LOL
06-16 08:02: ECB's Bini Smaghi says a shame that Greek opposition is playing strange gamesjust so you know some of our best traders are in congress:
House Minority Leader Nancy Pelosi (D-Calif.) saw her net worth rise 62 percent last year, cementing her status as one of the wealthiest members of Congress.
Pelosi was worth at least $35.2 million in the 2010 calendar year, according to a financial disclosure report released Wednesday. She reported a minimum of $43.4 million in assets and about $8.2 milion in liabilities.
The majority of her liabilities are from the neck up
:-) funny. and true.
You can bet she was out at the top.."oh, and Ben, keep me in the loop would ya."
DON'T WORRY PEOPLE!!!!
ALL WE NEED IS AN INTELLIGENT PLAN AND SOME CAPABLE PEOPLE AND WE CAN FIX THIS!!
!!!YEAH!!!!
WHO'S WITH ME!?!
LET'S DO THIS!!!
CHANGE YOU CAN BELIEVE IN!!!
........
....
.
crap...
You know I love this blog. Some smart and educated people hang here. I mean people who read not people who went to school.... Ice9. Very cool...
To the liquidity spike. See the not-yet-downgraded French banks from yesterday. Counterparties are turning of the spigot. Simple.
Is Greece a Lehman Event? More than you can possibly believe. Cash is where you want to be. Not PM. Not Bonds. This is the Cash cycle. The PM comes later.
''the PM comes later''
I have MRE''s, you have gold. I do not want your gold, I can live without you.
This could be and issue? http://www.youtube.com/watch?v=ooupzNgybEo
MRE's are good for how long? 1 year? 5? I live in the food basket of the most gorgeous island on the planet. So you can eat your MRE's while I get home cooked meals every single day. And younger, hotter women. LOL
...MRE's, you can take the Island food anywhere as an MRE.
Yes, I have been to the Island before the tsunami and the meltdown, very nice etc... http://www.youtube.com/watch?v=gPx_RjC3K-I&feature=related
...oh, they last about 7 but, 5 years is enough to reach the end of the last generation.
You live in Cuba?
http://bible.cc/revelation/2-13.htm
...yes, but, the Warden (Chairsatan) and the Prison Guard(s), ...well, don't call it Cuba, they get all huffy when you hold up the discount window mirror. On the books it's known as the District of Columbia.
...has something to do with a Goddess and the largest phalic (middle finger) symbol on the planet. Just call it the ''Bottomless Pit'' or ''Black Hole''. http://www.youtube.com/watch?v=fcYKhQTwD-I ...I call it ''Hell'' or ''Belly of the Beast''. I'm just walking through the valley of the shadow of death, fearing no evil ...of course. It's a mission, not an adventure ...and it's gone. I have been called a ''shit-head'' and forced out already, now I'm just standing fast, do know harm but, I am a stinker.
See the Middle Class finger over the host of Lucifer's shoulder? http://www.youtube.com/watch?v=NvQ26uU3d28&feature=related
...we are all in the same prison, if we want to escape. Calling it Cuba, D.C. or Babylon does not matter.
...same damned thang. http://www.youtube.com/watch?v=NRXKkUhe_B0
OK, but where are you going to store that cash?
Bank accounts are not secure enough if we take bigger sums in consideration.
In case of default small sums will be payed back, but when? I can takes months.
Smart move could be to rent a safe at the same bank you have an account and cash out physical paper.
US Treasuries.
Look what happened to their prices at other times of stress, like late '08 or spring '10.
It might be a little late now, but why not make some money---from the stress---and then buy PM's at, most likely, temporarily discounted prices (the USD rallies in these times of stress)?
"No wonder kids grow up crazy. A cat's cradle is nothing but a bunch of X's between somebody's hands, and little kids look and look and look at all those X's..."
"And?"
"No damn cat, and no damn cradle."
--Kurt Vonnegut, 1963
Also, the best review ever written, Harlan Ellison reviews Vonnegut's Slaughterhouse-5 for the LA Times, 1969:
http://latimesblogs.latimes.com/jacketcopy/2009/10/vonnegut.html
Jim. Never leave these pages. That was a fantastic link. Thank you!
"[...] there is nothing intelligent to say about a massacre. Everybody is supposed to be dead, to never say anything or want anything ever again. Everything is supposed to be very quiet after a massacre, and it always is, except for the birds."
We will see about that in not too distant a future, I suppose.
Somehow I never read Jailbird until last year. I was shocked--honestly, I thought I'd outgrown Kurt's auto-biographical first person schtick. Wow, was I wrong. The book was his frickin masterpiece, imo.
Yeah. Its attractive to teenagers but truly shocking to adults. Thats part of the reason why he has influence. Not my fav by any means. But must-read nonetherless.
Its novelty, like any new approach, certainly accounted for part of the impact back in the day, when he was one of my heroes. Yeah, I went back over the years and looked at his earlier books that I had read as a young man and sadly rolled my eyes.
Then I read Jailbird. If you haven't read it, take a look. It's amazing. He reached complete artistic maturity with that one.
Bob. I read it after I got back from Bosnia. I was in a receptive frame of mind like my quote about about teenagers. Adults need to see it for the power of its message. There is no message. There are no answers. Just ever decreasing and every less important lingering questions. Questions that people know the answer to, but forgot how to talk to each other.
Valerie Perrine's tits +10
Sorry, I just see the movies.
those are old model air bags...what about the ...cameron diaz, angelina J, penelope cruz types?
Vonnegut:
3mo Libor today .244
3mo Libor yesterday .245
With the exception that there are still tens of thousands of ARMs based on LIBOR in America.
ARMs, yes, but those are the least of one's worries considering mortgages are what, typically <$1MM in size? Also, Libor rate ARMs typically have a rate cap clause (or sometimes even 'MAXRATE') somewhat shielding the purchaser from high vol in the Libor market.
The real issue comes with corporate notes, i.e $100MM and + in size, either linked solely to Libor (think interest rate swaps) or to Libor and some other vehicle like an equity index. When one part of this goes to shit (higher Libor), the entity hurts, and so does whoever shorted (or, adversely, purchased) the thing.
Corporate Leverage Goes Option ARM As Floating Rate Debt Sees Largest Fund Flow In History
What about LEGS?
Any way to post a chart of FRA-OIS for the last 5 years?
http://www.sectsco.org/EN/ Point being who has raising cash? Clue its red.
Point being the participants in the SCO process share common positions regarding cooperation among the security, defense and law-enforcement agencies of the SCO member nations in fighting the "three forces of evil," that is, terrorism, separatism and religious extremism, the situation is entirely different when it comes to economic cooperation.
A bridge loan may be in order later for the ECB if the SCO can direct press to Greece and the ECB but you know adults need to act like adults. To get that deal the United States would have to move there support vessels out of the Black Sea as we speak. IMO no adults around lately. Let Greece be in time out until September. Voting better would help us all. Anyway many party's need to grow up. We need a consensus on Syria since that issue is more important to me overall. China I assume will mind there own affairs. Russia needs to head slap Syria if they have shread of decency since they have port there and could diffuse some genocide issues atm.
Ice-9 A global catastrophe involving freezing the Earth's oceans by simple contact with ice-nine is used as a plot device in Vonnegut's novel. You never know if mankind can think instead of killing each other.
Reading ZH and trying to keep current with all the jargon is the only thing that is standing between this old man's head and complete senility. Thank you Tyler and the all the rest of you insubordinate and irreverent bastards.
Love the Vonnegut ref...very apropos.
The quiet brilliance continues.
Yes, TD's Ref's are some of the best on the net.
Wide Ranging, Perfectly used, Always just obscure enough to not make them too easy.
INCREDIBLE SITE.
Cat's Cradle
Best Line in Book; When asked why he didn't play any games, he said, "Why play games when there are so many real ones going on?"
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This much bigger than you think. This is the ARS event of '07 - '08 on a global scale with Greece playing the role of BS and Ireland will play Lehman. The rate at which this plays out will be much faster. This will not end well.
You mean Jamie Dimon gets Greece ?
The role of Jamie is played by Angela. German ain't gonna want Greece anymore than JP wanted BS. The only good thing is that there is no longer this too big to fail concept.
And this is why I keep coming back to ZH. How many other places would better than 50% of the population instantly recognize the reference to Ice-9?
I tell ya, based on what I have been seeing the last few months and the absolutely stooooopeeed misallocation of liquidity, a liquidity freeze and rebalancing is desperately needed.
if we have an Ice-9 spotting maybe it's time to hang some central bankers on the hook?
"those caught practising Bokononism are punished with death by the giant hook"
NPR blathering about a hoped for 'rebound' in homebuilding, zeks waiting for a return of housing bubble from 2004 or so.
Where do they ('They') get these idiots? No wonder al Qaeda is so dangerous, peeps are smarter than 99% of US establishment.
Could you clear something up for me? I have 3m Libor at ~25bps and the OIS at ~12bps
so the spread is somewhere ~ 13bps or so..
How come the Bberg code shows what you have above? Mine has the same as you but from the spot market, i dont see the spread at 22bps...
Thanks!
I blame little Newt for the whole thing. He had to buy a personality.
Does anyone know if where to go to watch the 3-Month LIBOR-OIS? Anyone familiar with thinkorswim symbol for this?
What's wrong with that?