LIBOR Increasing Again

The much-ballyhooed reduction in LIBOR - the rate banks charge for loans to each other, and so an indication of liquidity - is slipping away.

As Bloomberg writes:

The premium banks charge each other for short-term loans, the so-called Libor-OIS spread, rose above 1 percentage point last week for the first time since Jan. 9. Contracts traded in the forward market indicate the gauge, which measures banks reluctance to lend, will remain higher for the rest of the year than before Sept. 15, when the bankruptcy of Lehman Brothers Holdings Inc. froze credit markets.

“Libor-OIS remains a barometer of fears of bank insolvency,” former Federal Reserve Chairman Alan Greenspan said in an interview. “That fear has been substantially reduced since mid-October, but the decline has stalled well short of any semblance of normal markets.”

The lack of lending between banks helped send the U.S. economy into a recession and may delay any recovery. Turmoil in money markets stoked last year’s tumble in stocks and fueled demand for the relative safety of Treasuries, gold and Japanese yen. Since Lehman collapsed, the Standard & Poor’s 500 Index lost 35 percent, 10-year Treasury yields fell below 3 percent, gold topped $1,000 an ounce and the yen climbed 12 percent.

“The fundamental outlook hasn’t changed,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee.