Libor-OIS, Greenspan’s favorite credit-market gauge, showed the freeze that has gripped the banks for the past two years will be all but over by mid-2011.
The chart shows the premium banks charge each other for short-term loans, the so-called Libor-OIS spread, fell to the lowest level in more than 17 months today. Contracts in the forward market show the gauge will drop to 25 basis points by June 2011, according to data compiled by Tullett Prebon Plc. Greenspan said a year ago he considered that level “normal.”
(click to enlarge)
“Greenspan’s right,” said David Keeble, head of fixed- income strategy at Calyon in London. “If you get down to 25 basis points you can say that’s a normal level. However, normality also depends on the activity in the interbank market as well as the level, which has been rather artificially induced. I think we’ll hit 25 before June 2011.”
The Libor-OIS spread, considered as a barometer of fears of bank insolvency, narrowed to 32 bsp today, compared with an average of 11 bsp in the five years to August 2007, when credit markets froze.