LIBOR

The US Treasury just completed the first of 3 bond sales, which as Zero Hedge observed last week, will take total US Debt to GDP to over 100%. Today's auction was more or less plain vanilla, with $35 billion in 2 Year bonds pricing at 0.281%, just inside of the 0.29% When Issued, higher than the September 0.249%, and with the Bid To Cover declining modestly from a near record 3.76 to 3.64 this month, which however is still the second best BTC for 2011. That said, the interest was not due to Directs who saw their take down share drop from 12.16% (and an LTM average of 14.30%) to just 8.21%, the lowest since February 2011. Yet while Directs (China's London-based buyers, PIMCO) Dealers stepped up and bought 52.57% of the auction, the highest since June. Naturally as has been the case recently, the bond priced well inside 3M USD Libor of 0.422%, something which in an era pre-central planning would be quite laughable, but now: perfectly normal.

3-month USD Libor has not dropped day-to-day since July 25th - a 46 day streak - and while the  individual rates indicated by LI(E)BOR are 'around' 37-43bps currently, someone (or more than one) is willing to overpay (by over 200%) as the Fed's USD swap line usage (or non-EURO tender operations) remains $500mm at a rate of 109bps (vs 107bps the previous week). Perhaps it is time for a certain French bank CEO (who enjoys all the media exposure when telling naive gullible mom and pops just how stable his balance sheet is) to sell some more non-performing assets? Or CSFB to explain how their rate has been flat for 11 days in a row now?

Earlier today we reported that 3 Month USD Libor hit a year high of 0.343%, jumping from 0.338% on Friday. The reason we bring this up is that the US Treasury just priced $32 billion in 3 Year Bonds (chart 1 below) at a yield that is below that of 3 Month Libor. As for what that means we leave the explanation to anyone who believes that a 0.000% on the 30 Year (which courtesy of Operation TurboTorque we may soon see) is perfectly normal. For those who prefer empirical evidence, the last time this spread inverted was back in early 2009 before the Fed bailed out the world for the first time (chart 2 below). Now, on the question who bails out the world this time around, with all the central banks "all in" already, we are not too sure. Either way, completing the auction details, was a Bid to Cover of 3.148, slighly lower than recent averages, a Dealer take down of 53.7%, or more than half, and Indirects accounting for 35.7% or about their average. The non-eventfulness of the auction was confirmed by the lack of tail, with the When Issued trading at 0.34% at 1pm.

There are only three charts that matter currently for a snapshot of the liquidity pulse in Europe. And unfortunately, it continues to be in V-Fib, according to the Euribor-OIS (spread between central bank and interbank borrowing or explicit riskiness in non-printing press backstopped market), the 3M USD LIBOR (or the funding need for USDs), and the ECB Deposit Facility Usage (lack of safe alternatives on where to plant bank cash). Well, the first is at 84.9bps, +2.9, the widest since March 19, 2009, the second is at 0.343, up from 0.338%, and the widest since August 18, 2010, and deposit facility usage is at €182 billion, the widest since July 2010.

As we speculated on Friday, Europe has opened, and it is ugly. In fact, Europe has never been closer to a bank and market holiday than it is right now. Why? Let's go down the list...

When it comes to counterparty risk, one can look at CDS, for an indication of how the market view a given bank's counterparty risk, or, one can observe how the banks themselves evaluate each other, courtesy of daily Libor fixings by bank. When it comes to Europe it is well known that dollar funding pressures are the most representative of overall liquidity stress. As such, we look at the 3 Month USD libor for various BBA-reporting banks. The picture, over the past month, is not pretty, especially if one is Barclays or RBS. The chart says it all.

Today's auction of $35 billion in 2 Year bonds was supremely forgettable aside from the yield, which once again was at an all time low, well inside of Libor, at 0.222% (to be expected since all bills for the next 3 months are yield negative rates), 1 bp inside of the When Issued of 0.23%. Even the internals were very boring, Directs, Indirects and Dealers all came on top of averages, with takedown ratios of 15.88%, 31.64% and 52.51%, and the Bid To Cover at 3.44, just wide of the LTM average of 3.38. All in all, a completely unremrkable way for Investors to park cash in what is the new equivalent of 4 Week Bills.

Further to the previous post speculating that while central planners do all they can to mask the symptoms of the European-wide liquidity crunch, the underlying issue is still very much alive, comes from the observations that the past two days' Libor fixing spread between a stable, domestic provider of 3 Month USD Libor and a less than stable one, shall we say, SocGen, has surged to the widest since early 2009. Granted, everyone knows that LIEBOR is the most manipulated unsecured funding metric available as it comes directly from the BBA member banks themselves (a process which is currently being investigated by regulators), but the fact that even post all the massaging SocGen has been unable to collapse the spread is very notable, and confirms that its stock price is purely a kneejerk reaction to this morning's short selling ban, one which as we demonstrated envisions lots of pain once the first reaction is internalized.

Whether the move in overnight Libor is due to an end of quarter window dressing scramble by the banks who in a Repo 105 fashion are doing their best to seem healthy, or it is due to the recent evaporation of European money market funds which are going into US securities, leaving Europe high and dry, is unclear; what is clear is that overnight EUR Libor just doubled, exploding by an unprecedented 85.5 bps to 1.78%, the highest it has been since early 2009 (see chart). Why is this troublesome: because the USD overnight Libor is at 0.128%, which is to be expected courtesy of the recent very much expected extension on the Fed's swap lines with European banks. But it does beg the question: instead of the traditional shortage of USD on every risk precipice, is there suddenly a massive black hole in overnight EUR funding, and has Chinese buying of euros by the bushel backfired and is about to further hobble European, and US, liquidity. As a reminder yesterday, General Collateral traded at the lowest rate ever, or -0.002%. Alternatively, this may be a function of the ECB providing less than expected euros in its latest 91 Day Long-Term Refinancing Operation, which saw 265 bidders scramble to secure €132 billion from the ECB. And meanwhile in China, despite all the recent attempt to reestablish liquidity in the market, the 7 and 14 Day SHIBORs both broke their recent downward trend. If this is all simple end of quarter liquidity shoring up, that's fine: thing should get back to normal tomorrow. If, however, the liquidity picture does not change on July 1, it may be time to step away from the keyboard and at least get to know where the nearest emergency exit is.

About a year ago, when Zero Hedge was nothing but a monocultured, bearish, conspiracy theory-based blog, we wrote a post titled: "Is The Swiss National Bank Using UBS To Launder Its Euro Purchases?" The reason for this allegation stemmed from some dramatic observations in the reporting of LIBOR to the BBA by member banks. To wit: "The Libor reporting dispersion among BBA member banks has actually
tightened marginally from last week, with one notable outlier: UBS. Of
the 15 banks that report both USD and EUR-based LIBOR, all disclose a
higher offer rate for EUR Libor except for UBS! The Swiss bank is a
blatant outlier, in that its disclosed EUR Libor rate of 0.4850% is in
fact 10% lower than its USD Libor." Out explanation for this anomaly was that the Swiss Bank, most likely in concert with the ECB, were manipulating intercurrency unsecured funding reporting in order to mitigate FX mismatch: "SNB buys EUR in the open market (causing massive destruction in the EURCHF and GBPCHF pairs), then the excess euro holdings are funneled back into the market via a much cheaper EUR lending rate in the 3M funding market (LIBOR) compared to all other banks: the UBS 3M EUR Libor rate is a whopping 30% below the average EUR Libor rate of 0.6344%, nearly double the spread from average of the next lowest EUR Libor offer, that of RBS at 0.56%." Once again our monocultured perspective appears to have served us well - per Dealbook "UBS said Tuesday that United States and Japanese regulators were investigating whether the Swiss bank tried to manipulate a key benchmark used to set interest rates around the world." We can't wait to see what the Mainstream Media does with this one, as usual with its roughly one year delay.

Following up on yesterday's comments: equities are so far unbelievably resilient in the face of atrocious economic data. Keeping our eyes on the prize, we have been calling for this slow down in economic activity since April, and the work of my friends Julian Brigden and Jonas Thulin on the economic roll over has helped solidify that belief and time this turn. Now that the data is playing ball and confirming our sentiment, we turn to the technical picture where I have had this uneasy feeling that the equity markets could bounce here before selling off properly. With higher rates for European sovereign bonds today after Ireland's downgrade, all time lows in new home sales on the heels of a knock-out drop in existing home sales that will dry up your green shoots and make you wish it's just a double dip, and a huge miss in durable goods orders, the fact we just made it in positive territory back from the abyss this morning is the kind of price action that makes me feel better about yesterday's technical observations against our bearish fundamental outlook. - Nic Lenoir

The most important story nobody talks about continues developing, with both Euro Libor and Euribor (3 Month) jumping to year highs. The much more popular funding rate, Euribor, just hit 0.905%, compared to 0.904% yesterday as tightness across the banking sector continues, on expectations that the ECB may cease providing constant backstops to everyone (1 week Euribor was 0.569%, 1 month: 0.649%). With the European policy rate at 1.0% the collapsing bank lending market may soon pressure banks to go exclusively to the ECB for overnight lending, in addition to all their other funding needs. And to think all this was supposed to be avoided with "successful" completion of the stess farce... And while Euribor has been on a non-stop tear higher, EUR Libor had recently dropped marginally. Well, no more. Market News reports, "The euro 3-month LIBOR rate was up 0.369 basis points on the day to stand at 0.8348%, edging nearer to the official 1% policy rate and at its highest level for almost a year. At the monthly press conference Thursday, European Central Bank head Jean Claude Trichet talked about normalisation of EONIA rates, and raised no concern about euro market rates moving higher. The euro LIBOR/OIS 3-month spread was almost 0.37 basis points wider on the day."

Another day, another tightening in European interbank liquidity. The Euribor rate fixing jumped across the board: 1 week went up from 0.564% to 0.565%, 3 Month rose from 0.9% to 0.904% on its resolute ascent to 1%, and 6 Month rose from 1.149% to 1.152%. And not to leave the latest bout of EUR covering unattended, Libor also decided to join the festivities: from Market News "The euro 3-month LIBOR rate rose 0.19 basis points on the day to stand at 0.83219, still well below the official 1% key policy rate. Three month LIBOR/OIS spreads in dollar, euro and sterling have all converged into a narrow range, of just under 1.5 basis points, with the dollar spread at 23.9 basis points, euro just under 24.7 bps and sterling at 25.4 bps. The euro spread narrowed by 1.2 basis points Thursday, with the 3 month OIS rate up 1.4 basis points." Once Euribor passes the ECB rate, then we have a big problem... There is just 0.096% to go.

As expected, the tight correlation between European interbank funding rates and the EURUSD FX rate continues: today, we have seen the first inflection point in both 3M Euribor and 3M EUR Libor, as both have dropped marginally lower, the first from 0.899 to 0.896, the second from 0.83344% to 0.8325%: this is the first decline since July 14. And, not surprisingly, today we see a big pullback in the EURUSD complex. Never too far behind with its own attempt at an explanation, here is Goldman, which after calling for 1.15 in the EURUSD flipflopped yet once again, and is now selling the other side of its 1.35 target to clients.

Even as RBS attempts to once again soothe the frayed nerves of concerned investors with groundless Koolaidery, 3 Month EUR Libor has once again jumped to 2010 highs. As Market News reports, even as the overnight EUR LIBOR rate "plunged, and one and two week rates fell markedly, ahead of the month-end" and ahead of eurodollar arbitrage settlements, "the 3-month LIBOR continued its ascent." Which should be very concerning to all, especially RBS which once already burned its investors by outright prevaricating the truth about Greece in February when the bank refuted facts presented by Zero Hedge there was a bank run in the country. Alas, those who listen to RBS' unfounded optimism once again likely to be burned: "The “widening is very minimal,” says Jacques Cailloux, chief European economist at Royal Bank of Scotland Group, who says this same rate surpassed 5% at the height of the global financial crisis in 2008. “I wouldn’t go so far as to say that it (the rise) suggests things are getting worse. With both Euribor and 3 Month EUR Libor, not to mention top tier European Commercial Paper, at 2010 highs, to say that the European money market is getting better is simply idiotic.