Over the last few weeks a metric for borrowing rates in the U.S. has started to climb, and it has concerned some investors who trade in financial instruments with very short-dated maturities.
A metric that measures the difference between Libor (the London interbank borrowing rate where banks lend to each other unsecured) and the overnight interest rate swap (the rate tracking the interest rate set by the central bank) has shot up to more than 50 basis points. Known as the Libor-OIS, it's now at the widest it has been since the euro zone sovereign debt crisis of 2012. It widened more than 15 basis points in the last month alone.
A widening of Libor-OIS is typically associated with heightened credit concerns, however this time analysts are pointing to several structural shifts in money markets (markets that trade in securities with short-dated maturities) rather than banking concerns — as banks are now flooded with liquidity and are generally performing better.
Analysts at Bank of America Merrill Lynch (BAML) have pointed to four factors that are contributing to this rise:
1. An increase in Treasury bill issuance this year with the administration's spending plans. BAML analysts have calculated that the amount of supply (how much the U.S. government borrows) over the past five weeks has exceeded the net bill supply in 2017 by over two times. The extra supply is also beginning to impact demand for Treasury bill auctions. Last week's four-week bill auction saw the second lowest bid-to-cover ratio since 2009.