Liquidity. A word you will hear often repeated today, in fact the more you hear it, the less of there is. Here is Morgan Stanley's Jim Caron discussing why worsening USD funding conditions will force the Fed's FX swap lines to start being used again, now that FX implied USD Libor has passed 1.22%.
The key take-away today is that the FX implied borrowing rate for US dollars for 3-months has risen to 1.28% (see left hand chart below). The significance is that the 1.28% rate exceeds the emergency back-stop rate of 1.22% as provisioned by the ECB and the Fed with the reinstitution of the FX swap lines. We can expect to see more European entities now start to tap this liquidity facility. Again, liquidity is still available, it's just coming at a higher price - a key distinction to make between what is going on today and the crisis in 2008.
- LIBOR set 2.7bp higher at 0.53625% - roughly double the pace of the steady 1-1½bp increases we’ve seen to date
- 2y spreads were another 3bp wider after gapping 10.5bp higher yesterday
- Dollar is approaching its recent high, being up 1.1% on the day
- Deflationary concerns continue to abound, with crude down 3.3%, S&P down 2.3%, 10y breakevens down another 8bp
- Sov CDS is up as well, with most yield curves flattening on the day (taking out inflation expectations down the road)