Craziness at the Short End of the Yield Curve

What's going on with Libor?

Painfully and predictably, overnight dollar Libor has spiked to an eye-popping 6.44%, up from 3.11% yesterday. And sterling Libor rose a lot too: it's now at 6.79%, up from 5.4%. But look at euro Libor: down, to 4.41%, from 4.49%.

What this says to me is that this isn't some kind of global bank run: investors in general, and banks in particular, aren't reconsidering the trustworthiness of banks in general. Rather, they're reconsidering the trustworthiness of US banks in particular.

This is good news -- or about as good news as an overnight spike of 333bp in dollar Libor can ever be. It means that the problem is localized, and that insofar as there's a flight to quality, much of that flight is merely geographical -- from the US to Europe.

Of course, it's also from bank debt to Treasuries. Check this out:

The Treasury Department auctioned $28 billion in three-month bills at a discount rate of 1.050 percent, down from 1.690 percent last week.

Looks like Paulson's making money from this crisis: his interest bill is falling by the day!