While optimism still prevails in the financial markets, one of the most important indicators points to serious problems – the availability of dollar liquidity.
Dollar liquidity, or rather the cost of dollars on the interbank market, is one of the most faithful and tracked by financiers indicators of future financial turmoil and the credit crisis.
At the moment, he has gone out of the six-year range, USD LIBOR-OIS (the difference between the rates on dollar loans for three months and index swaps overnight) on Friday rose by 2 bp. p. and reached 44.23 bp P.
Now the indicator is at its maximum since the European financial crisis of 2012, which was prevented only by the efforts of the Federal Reserve, which opened an unlimited dollar swap line for the ECB. Recall that in the eurozone then there were serious problems in the banking sector and lenders simply stopped giving loans to each other in dollars.
In fact, the current situation in the credit market is not a surprise. Many experts are actively discussing what has been happening since the end of last year. Nevertheless, the speed with which LIBOR-OIS is expanding has taken many analysts by surprise: many are trying to understand what is happening.
Below are a few factors that affect the value of dollar liquidity at the moment:
- an increase in the supply of short-term US debt securities,
- outflow of funds from dollar deposits due to rising rates,
- US monetary policy uncertainty risk premium,
- increase of credit default swaps (CDS) of banks,
- demand for dollars due to the repatriation of capital as part of the US tax reform.
Some of the items listed are quite ordinary, but some may say that everything is not as good in the financial system as it seems.
Whatever the reason for the continued growth of LIBOR-OIS, all this adversely affects both dollar financing and hedging costs. Most of all this affects foreign banks.
One Deutsche Bank review recently said that rising spending on dollar financing could be detrimental to the profitability of hedged investments.
Moreover, for Japanese banks, it is now more profitable to buy 30-year bonds of the local government than similar treasuries, taking into account the hedge. The situation is similar with the German Bundes.
There is no doubt that rising dollar borrowing costs will have a strong impact on all debt markets, as the three-month LIBOR rate is still the base for trillions of dollars of borrowings around the world. However, without an accurate diagnosis and the reason for such growth, assessing the consequences is also quite problematic.