Over the past two weeks, one-month and three-month GBP/USD FX swaps have moved from –2 and –5 to +2 and +5 respectively, equating, by my reckoning, to about 35 basis points of dollar tightening in the interest rate spread. But it took a note on Tuesday from Laurence Mutkin and Elaine Lin of Morgan Stanley to put the move in some perspective.
They point out that that the ECB’s “full-allocation USD tenders provide an unlimited amount of USD to banks at an implied OIS+100bp”. However, with that implied level still far higher than Libor and even the FX basis, the tender has so far “attracted a negligible $1 billion of interest from the market” – a different situation to 2008 when it was “accepted with enthusiasm”. Incidentally, on Wednesday The Wall Street Journal cited the old journalistic staple “people familiar with the matter” as saying that “Spain’s Banco Bilbao Vizcaya Argentaria, or BBVA, is reportedly unable to renew its $1 billion of short-term funding in the US.”
Morgan Stanley also notes the widening of forward Libor/OIS spreads compared with spot spreads and that the gap between spot and forward spreads “is now much higher than at any time in the past, including the depths of the liquidity crisis”.
Mutkin and Lin conclude that, while the repricing of spreads has been sharp, we are still nowhere near the levels of stress seen in 2008 and Morgan Stanley does not think a repeat of the carnage is likely.
Their note suggests four causes for the move: that it represents an increase in balance sheet ‘rent’ post the credit boom; that, similar to the first cause, it represents the perceived costs to bank business of increased regulation; that, in an environment where certain means of investment expression (naked shorts) are curtailed, crowding into Libor/OIS spreads could be seen as a proxy; the spill-over of sovereign risks back to financial institution capital has caused a revision in the view of those institutions’ liquidity positions and the potential for this to lead to a widening in bank CDS and Libor/OIS spreads.
As the spreads near the effective boundary set by the European Central Bank’s liquidity tenders, Morgan Stanley expects the widening to slow and that, although it “amounts to a tightening of monetary conditions in the non-financial economy” such a tightening is far from instantaneous. The effects on economic growth, especially if offset by official interest rates being kept lower for longer, might still be minimal.
