ADVERTISEMENT
ADVERTISEMENT

A forgotten metric is at its highest level since the financial crisis — here's why you shouldn't freak out just yet

A short-term borrowing indicator has hit its highest point since 2009.

  • A measure of how expensive it is for banks to borrow has increased more than five-fold in just four months.
  • Libor-OIS just surpassed levels last seen in 2011, and is now at its highest point since the financial crisis.
  • Rising Treasury bill issuances and tax reform could be to blame.

A short-term borrowing indicator has hit its highest point since the Great Financial Crisis, but that doesn't necessarily mean another meltdown is on deck.

The spread between London Interbank Offered Rate and the overnight index swap (Libor-OIS) — basically a measure of how expensive it is for banks to borrow — has skyrocketed over the past four months, from 0.10% to 0.58%.

But the sharp widening has more to do with recent political moves than with systemic glitches in the economy, analysts at Credit Suisse wrote in a note to clients sent out on Friday.

ADVERTISEMENT

"We believe that the widening is purely technical and is no indication of any systemic risks facing the financial sector,"

Other indexes, including the high-yield spread, aren't showing signs of stress. And there has been little significant impact on the cross-currency basis, which measures the cost of borrowing US dollars backed by foreign currencies.

So, what's causing the gap to spread so quickly? Credit Suisse says its rising Treasury bill issuance and President Donald Trump's tax reform.

After Congress voted to lift the debt ceiling last month, the US Treasury Department has been ramping up its cash balances by issuing bills. A record amount of Treasury bills and notes, about $294 billion, will likely be auctioned this week.

Additionally, the US tax overhaul passed in December incentivizes businesses to repatriate money from abroad. Because this decreases demand for offshore treasury bills, foreign banks are instead funding themselves through the interbanking market.

ADVERTISEMENT

The current Libor-OIS spread is likely nothing more than a product of sweeping political moves over the last few months, according to analysts. But further widening could be cause for concern, especially for Americans.

A bigger gap would mean additional funding costs for more than half of US corporations, about 53%, which could hurt at a time when the Fed is also raising interest rates.

Additionally, nearly $1.8 trillion of bonds and 12% of consumer loans are tied to the Libor rate, according to the New York Fed.

But Credit Suisse says there's no need to worry just yet.

"We should see reduced upward pressure on Libor-OIS spreads by the middle of April," Credit Suisse said. "April tax receipts should ease the Treasury’s cash needs and hence reduce the need to issue bills. Moreover, the repatriation of offshore cash can be seen as a one off."

JOIN OUR PULSE COMMUNITY!

Unblock notifications in browser settings.
ADVERTISEMENT

Eyewitness? Submit your stories now via social or:

Email: eyewitness@pulse.ng

Recommended articles

Here's everything to know about being a virgin on your wedding night

Here's everything to know about being a virgin on your wedding night

7 do's and don’ts of the Holy month of Ramadan

7 do's and don’ts of the Holy month of Ramadan

Top 5 sweetest celebrity mother-child relationships that stand out for us

Top 5 sweetest celebrity mother-child relationships that stand out for us

International Women's Day: 5 Nigerian female celebrities championing women’s rights

International Women's Day: 5 Nigerian female celebrities championing women’s rights

Top 5 female directors in Nollywood

Top 5 female directors in Nollywood

6 things that will break a Muslim's fast during Ramadan

6 things that will break a Muslim's fast during Ramadan

5 benefits of fasting during Ramadan

5 benefits of fasting during Ramadan

5 reasons Easter was more fun when we were children

5 reasons Easter was more fun when we were children

Dos and don’ts of supporting Muslims during Ramadan

Dos and don’ts of supporting Muslims during Ramadan

ADVERTISEMENT
ADVERTISEMENT