3-Month Libor Drops Again - 8 Days In A Row

This is a good sign. The reason being suggested for the drop in Libor is that the USA has made $540bn available to money market funds.  The government has been buying commercial paper from the money market funds to help them meet redemptions.  In a free market economy, typically rates on commercial paper would be rising at a rapid rate.  The increases in rates would compensate investors willing to take the risk of owning the commercial paper money markets.  The government intervention, however, is artificially reducing rates, thereby compounding the problem.

Investors with cash in T-Bills or other “more secure” investment vehicles are not being fairly compensated by money market funds to take the risk of owning commercial paper.  As a result of the lower rates, investors sit in T-Bills or Treasury money funds.  This is another example of the government trying to protect industry.  The largest issuers or commercial paper are banks and other corporations.  Their borrowing costs would go higher, if the market could operate efficiently, without intervention.  The government doesn’t want this to happen as it will result in more layoffs, higher unemployment, more company failure etc.  They’re trying to put fingers in the dike, but every time they do, another leak springs up.

From Bloomberg:

• The London interbank offered rate, or Libor, that banks charge each other for such loans slid 16 basis points to 1.12 percent today, the British Bankers’ Association said. The three- month rate dropped for an eighth straight day, to 3.54 percent, its longest run of declines since May. The Libor-OIS spread, a measure of cash availability, fell to 250 basis points, the lowest level in three weeks.

• Credit markets froze after the collapse of Lehman Brothers Holdings Inc. on Sept. 15, prompting governments and policy makers worldwide to bail out banks and inject cash into money markets to revive lending. The Fed yesterday invoked emergency authority to buy assets from money-market mutual funds that are having difficulty meeting redemptions. The initiative is the third government effort to help the funds, which provide a key source of financing for banks and companies.

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