Whac-A-Mole! Fed Faces Nightmare As Libor, Cross-Currency Basis Blow Out, CP Market ‘Frozen’

Update: Later Tuesday, the Fed reinstated the crisis-era commercial paper funding facility (see the details here)


The dollar-funding stress is getting worse.

As noted first thing Tuesday morning, tension is building in cross-currency basis (again), and that’s helping push the dollar inexorably higher.

“Funding tensions… will largely dictate movement for the G-10 currencies in the short run,” Shaun Osborne, chief FX strategist at Scotiabank, remarked. The three-month basis for the euro widened to -128.5bps at one juncture, a testament to severe strain, and a decidedly unwelcome development for the Fed after Sunday evening’s actions aimed at alleviating just these kinds of pressures.


Insult was added to injury when three-month dollar Libor surged 16.25bps to 1.05188%, the largest jump since the crisis.

That is an issue, as it’s one possible transmission channel from Wall Street to Main Street, although after Monday (and last Thursday), it’s safe to say voters are well aware that what’s going on in markets has the potential to affect their financial well being.


“A more material easing of cross-currency pressure may not come until the Fed fixes the CP market and there are more avenues available to secure USD funding”, BofA cautioned, after the Fed’s Sunday night “whatever it takes” moment which is now looking increasingly inadequate.

Commercial paper spreads are at stressed levels, reinforcing calls for more proactive measures from the Fed to “buffer ‘frozen’ markets, ahead of potentially massive outflows in order to raise cash in [the] coming-days”, as Nomura put it Monday.

Essentially, corporates that can’t tap the commercial paper market may need to draw down credit lines instead. Then you end up with more headlines like those which rattled markets last week, when multiple companies announced plans to tap loan facilities. That’s the colloquial, “plainspeak” version – or the “plain English” version, to employ a Jerome Powell-ism.

The Fed took $45 billion of securities in Tuesday’s 14-day term repo. Dealers submitted $46.6 billion. That’s a continuation of the trend. Every 14-day operation since February has been oversubscribed, and it’s probably safe to say the only reason this one wasn’t more oversubscribed is due to the myriad other liquidity on offer including, for example, Tuesday’s O/N operation which had a “limit” (and the scare quotes are there for at least two reasons) of $500 billion. It was undersubscribed, but that’s not really saying much. The Fed accepted $142.65 billion of securities in that action.

“Commercial paper rates, dollar bond spreads, credit default swaps and new debt offerings remain under pressure and very much reliant on central bank liquidity measures”, former trader Richard Breslow wrote Tuesday. “Making sure that funding markets remain viable is the real ‘whatever it takes’ priority for the central banks and their work isn’t done”, he added.

If you ask BofA’s Mark Cabana, the Fed should “invoke rule 13-3: Commercial Paper Funding Facility [and] buy CP/CD directly from dealer balance sheets”. And right quick, too.

“The Fed needs to signal that these programs are coming as soon as possible to reduce credit concerns and calm funding markets”, Cabana wrote Monday evening.

The absence of an announcement on any CP facility Sunday from the Fed was a letdown, but, as should be evident from the above, they’re playing Whac-a-mole at this point. And, as Nomura wrote Monday, “the market remains focused on a TARP- / TALF- like solution in order to assist distressed industries [and] assets”.

That, of course, needs buy-in (figuratively and literally) from lawmakers. And so, everyone is left in the lurch and markets are left to freeze, mimicking the gridlock inside the Beltway.


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One thought on “Whac-A-Mole! Fed Faces Nightmare As Libor, Cross-Currency Basis Blow Out, CP Market ‘Frozen’

  1. It seems at this point the central banks have given the banks a free pass, i.e., capital waivers, liquidity waivers. Why not have the banks hold CP on their balance sheets for now?

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