Contrarian Profits'  Instablog

Banks are starting to trust each other more. The three-month Libor – which sets the borrowing cost of $360 trillion in financial products – dropped the most in four months on Monday.

This from Bloomberg:

The London interbank offered rate, or Libor, for three-month dollar loans declined three basis points today to 0.75 percent, the British Bankers’ Association said, bringing its drop in the past two days to seven basis points, the most since Jan. 13. The rate has decreased in each of the past 35 days.

“The tension has disappeared and we are gradually normalizing,” said Patrick Jacq, a senior fixed-income strategist in Paris at BNP Paribas SA, the biggest French lender. “There’s less stress in the market and banks know they will get liquidity.”

That’s a massive drop from the three-month LIBOR peak of 4.82% back in October.

The TED spread has also dropped. This key credit indicator, which measures the difference between the three-month T-bill interest rate and the three-month Libor, has hit the lowest level since the credit crisis began.

These narrowing spreads are a clear indication that the lending markets are returning to normal. But even with this improvement, the TED spread is twice as high as its historical average. And the Libor is three times higher than its average.