Credit Markets Showing Signs of Thawing

 |  Includes: DIA, QQQ, SPY, XLF
by: ContraHour

The credit markets are finally showing some signs of thawing. 

First, the LIBOR for three-month loans in dollars dropped for a fifth day, sliding 8 basis points to 4.42 percent.  LIBOR is the rate at which banks lend to each other for short term loans.  It declined 40 basis points this week.  While it's not much, it's better than seeing it continue to rise.   

The LIBOR is important because it's the underlying interest rate tied to many commercial loans.  While most mortgages in the United States are priced off the prime rate, most commercial loans are priced off of LIBOR.  

The difference between LIBOR  and the three month treasury bill interest rate can be used to judge the stress in the financial system.  When the difference between the two rates (also called the TED spread) is wide it shows a reluctance to lend between banks.  The chart below shows that the TED spread widened to historic levels in the past weeks but, for the first time in that time has shown a slight improvement.  You can track the daily movements of the TED spread on the Bloomberg website.

click to enlarge images

TED 101708

Source: Bloomberg

In a post several weeks ago, I also posted the commercial paper spread as well as the LIBOR - OIS spread.  Both are showing similar signs of improvement.

Commercial paper T bill spread 101708


Source: Bloomberg

Another sign that the credit markets are thawing comes from the interest rates on asset backed commercial paper.  Since the credit freezes of last month, the rates of all classes of commercial paper have been declining.

CP Rates 101708

Source: Bloomberg

While credit market participants are far from confident, the market is showing some signs of thawing.