Monday, October 20, 2008

Credit Markets Begin to Stabilize

MarketWatch reports Short-term borrowing costs drop

LONDON (MarketWatch) -- The cost of short-term dollar loans dropped more than expected Monday, a signal that money markets are slowly returning to normal after threatening to derail the global financial system earlier this month, economists said.

The London interbank offered rate, or Libor, for three-month dollar loans fell to 4.05875%, down sharply from 4.41875% on Friday.

Libor, which is set each day in London, is an indicator of short-term borrowing costs in the arcane -- but crucial -- interbank lending market.

The rate remains abnormally high, but it's climbed down from peaks set earlier this month as financial institutions all but halted loans to each other amid fears of further bank failures. The freeze in wholesale funding weighed on other types of lending, threatening a collapse of the credit system.

Minyanville’s Jeff Saut writes Credit Markets First Sign of Stability

As my readers know, I've always thought the credit markets are smarter than the equity markets, and therefore have been watching various credit spreads intently. The credit markets, ladies and gentlemen, will be the first “tell” as to when things will stabilize - and Mr. Bernanke is correct that “stabilization of the financial markets is a critical first step.”

Late last week, the “first steps” to some kind of stabilization seemed to occur. For example, the November Eurodollar contract was sharply lower on Friday, as was the 3-month LIBOR interest rate. Rumors swirled that a major bank was lending heavily in the inter-bank market and the credit markets took a baby step toward thawing. I'm hopeful that this will spill over into equity markets, this week because the set-up for at least a trading bottom looks promising.

Today, the TED SPREAD and VIX have both pulled back, though they are still very high. We can expect, at least in the short run, a more relaxed stock market and an increase in bank-to-bank and bank-to business lending.