For weeks, the money market correctly signaled a reduction in worry about the global banking system, continuing to act more like a liquidity market than a credit market ahead of the release of Europe's stress test results a week ago Friday and in its aftermath. If there's one place worries about banks will show up it is in the money market, where inter-bank rates are set.
Last week the money market was a leading gauge of whether the widespread criticism over the assumptions applied in Europe’s stress testwere just a talking point or were a true worry for the markets. The behavior of the money market last week made it clear that the chatter about the assumptions was just that. This helped rally risk assets and this message was reinforced strongly with the rally in global equities on Monday.
One of the clearest signs that the money market has returned to reflecting liquidity conditions rather than credit conditions is3-month LIBOR. Its decline accelerated last week, with Monday's setting at 44.5 basis points, down 4.3 basis points on the week following a 3 basis point decline the previous week.