Libor is probably set to begin falling, perhaps sharply in response to not only the massive support measures announced by the G-7, but also because of the announcement Monday by the Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank regarding actions commenced yesterday by the BOE, ECB, and SNB wherein each offered an unlimited supply of dollars at fixed interest rates, which in yesterday's auction, or tender, was substantially below Libor.
The auctions will be for 7-, 28-, and 84-days and the unlimited scope marks a sharp contrast to recent times which have seen, for example, paltry sums of $25 billion made available, far lower than demand, as gauged by recent tender results. Eventually, the lower rates paid on loans granted by the central banks will reduce Libor, both because of the rate effect, and because banks are now more likely to meet their dollar needs and the market will hence become sated with dollars.
Yesterday's auction was for 7-day money, which was auctioned off at 2.277%, well below Tuesday's 7-day Libor rate of 4.075%, which fell to 3.825% yesterday from 4.075% Tuesday, and to 3.45% today, a whopping decline of 37.5 basis points. The dollar amount of the tenders was as follows: $170.9 billion in loans from the ECB; $76.3 billion from the BOE; and $7.1 billion from the SNB.
Eventually, banks will begin to extrapolate from the 7-day rates charged by the BOE, the ECB, and the SNB and arrive at a rate that should be paid on 1-month Libor, since 1-month Libor is essentially a bet on where 7-day Libor will be over a period of four weeks (by extension, 7-day Libor is a bet on where 1-day Libor will be over a 7-day period). While the 1-month rate and other term rates are likely to be above the rates paid to the central banks (in contrast to the fully collateralized loans granted by the central banks, Libor-based loans are riskier because they are unsecured), there is plenty of room for Libor to fall substantially from current levels. This obviously is likely to be more a process than an event in light of current anxieties.
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Tony Crescenzi is the Chief Bond Market Strategist at Miller Tabak + Co., LLC where he advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of the forthcoming book, "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."Crescenzi is a contributor to RealMoney.com."