The 18m into 1yr FRA-OIS is now 51 bps mid vs 40 in January
The FRA-OIS curve has steepened since January
Mar 09 1) 90.00
Jun 09 2) 83.38
Sep 09 3) 78.50
Dec 09 4) 81.50
Mar 10 5) 63.00
Jun 10 6) 55.00
Sep 10 7) 47.00
Dec 10 8) 47.00
Mar 11 9) 35.00
Jun 11 10) 28.00
Sep 11 11) 26.00
Dec 11 12) 32.00
Mar 12 13) 34.00
Jun 12 14) 29.00
Sep 12 15) 29.00
Dec 12 16) 28.00
Mar 13 17) 30.00
Jun 13 18) 28.00
Sep 13 19) 28.00
The Jun11 and Sept11 FRA-OIS is pricing in virtually zero term premium for 3mLIBOR
Meanwhile front end OIS spreads have widened by 9 making the “roll-up” more attractive
3mLIBOR did find a floor in the 1% area as we expected (at least so far…):
Option on continued financial distress and/or a new paradigm for FF-LIBOR spreads.
From a fundamental standpoint the forward timing of these spreads coincides with termination of TLGP guarantee issuance and other Fed/Trsy financial support programs.
Mar09 (Front)
Jun11 (sweet spot)
Fed Funds effective rate currently 9bps:
But where will 3m LIBOR be? Currently 1.3975%.
Thus current spot setting is 130bps.
Front rolling OIS-LIBOR:
5th rolling OIS-LIBOR:
9th rolling OIS-LIBOR:
The long term floor for FF-LIBOR has been 12-15bps:
1y FF-LIBOR basis swap:
Banks are still not lending to each other unsecured for term.
The term premium for funding will remain steep as long as financials want to keep flexibility in their cash holdings.
The premium for term LIBOR is further supported by the level of financial CDS:
It is hard to imagine banks lending to each other at levels below those implied by CDS (unless Government or FDIC guaranteed):
Bank 5yr CDS
| BANK | 5yr CDS |
| American Express | 245.6 |
| BBVA | 81.1 |
| BNP | 59.1 |
| Banco Santander | 82.2 |
| Bank of America | 110.1 |
| Barclays | 140.5 |
| Citigroup | 164.5 |
| Commerzbank | 73.1 |
| Credit Agricole | 69.2 |
| Credit Suisse | 165 |
| Deutsche Bank | 119.600 |
| Goldman | 246.3 |
| HSBC | 90.1 |
| ING | 113.2 |
| JPMorgan | 110.1 |
| Opec Country | Jan Est. |
| Lloyds TSB | 93 |
| Merrill Lynch | 112.5 |
| Morgan Stanley | 357.4 |
| RBS | 112.8 |
| Soc Gen | 95.3 |
| UBS | 194.7 |
| UniCredit | 104.7 |
| Wachovia | 111.4 |
| Wells Fargo | 110.1 |
| Average | 131.7333 |
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