Loading ...Credit market Libor3 to 3 month T bill ratio
Libor3 to T bill showing early indication of market trouble. The spread between Libor3 and T bills has been declining during boom time. But last week saw the spread rising (widening).
There are three charts below:
Libor 3 daily, Libor3 to IRX ratio and Libor 3 to IRX ratio 2007 to 2010.
Per TSI blog : ” The short-term interest rate at which banks lend to other banks versus the equivalent interest rate at which the US federal government borrows money, as depicted on the following chart by the LIBOR-UST3M spread.
When trouble begins to brew in parts of the banking system it gets reflected by higher interest rates being charged for short-term inter-bank loans well before it becomes common knowledge. This causes the spread between 3-month LIBOR (the average 3-month interbank lending rate) and the 3-month T-Bill yield to increase. For example, the LIBOR-UST3M spread was languishing at around 0.20% in early-2007, indicating minimal fear within the banking system, but then began to rise steadily and reached 0.75% in June-2007. This was an early warning sign of trouble. The spread then pulled back into July-2007 before rocketing up to 2.25% in August-2007. This constituted a very loud warning. After that the spread became very volatile and moved as high as 4.5% at the peak of the Global Financial Crisis in October-2008.”
The ratio 2007 to 2010:
Good article. Thanks.
Excellent Information Bikoo99 and thanks to TSI
Bikoo:
Your TSI guy and Martin Armstrong seem to be on the same page. In this article, Armstrong refers to a monthly close of the LIBOR, but I believe he’s referring to the 3 month LIBOR similar to your TSI guy. The caption of the article says it all but in the body of the article nArmstrong posits that the bad news will hit in about 1 1/2 years.
https://www.armstrongeconomics.com/markets-by-sector/interest-rates/interbank-rates-starting-to-rise-monetary-crisis-is-beginning/
Jim
It is correct that Libor3 has been rising and is at highest level since 2008.
BUT just the rising rate is not the indicator. It is always the spread between the interrelated rates.
Looking at the long term chart it shows Libor3 bottom in 2014 at 0.233 and ever since rising while the spread between libor3 and 3 T bills continually dropped . Thus the boom in market experienced til last week when the spread bottom appears turning up. So widening spread is the clue to market internal than just the nominal rate.
Current libor 3 has risen from 0.233 in 2014 to 2.74.
Spread provides how arbitrage in the credit market is working and what it means.
Makes sense Bikoo. That third chart was frightening if you on’t consider the spread.