Crescenzi: Message of the Money Market
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.
September Eurodollars are priced for LIBOR to fall to about 40 basis points, and this looks possible in light of forward rates on LIBOR-OIS, which are priced in this vicinity. Speculation over whether the Fed might again engage in QE reinforces the trend.
Another sign of reduced worry about banks continue to be seen in the commercial paper market, where issuance by financial companies is increasing and at longer maturities.
In the week ahead the money market will follow the impact of this week’s big economic news, focusing on forward views on central bank rates.
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Tony Crescenzi is Senior VP, Strategist, Portfolio Manager Pimco. 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 "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."