Global Coordination

Central banks of the world, unite! And fail to calm markets.

Stocks reacted well while treasuries lost ground this morning to overnight news that as much as $180 billion worth of funds was pumped into financial markets by central banks across the developed world. But the situation had nearly reversed itself by early afternoon. One key piece of news: a stampede for the doors forced Putnam to close a $15 billion money market fund.

The liquidity injection also failed to lower borrowing costs one-to-three months out, a worrying sign, said Wrightson-ICAP chief economist Lou Crandall. In fact, the 3-month Libor-OIS spread (which is very close the TED spread) shot to a new high of 1.48 percent this morning:



Once again, the spread between 3-month Libor and ICAP's 3-month New York Funding Rate hit a new high today:



What accounts for the difference? I speculated on Tuesday that part of it was due to the way the two measures are collected (both because NYFR is anonymous while Libor is not and because NYFR asks for a perceived market rate while Libor tracks the rates offered polled banks).

When I put the question to Crandall, he added that time zone differences could also account for some of the difference, especially when markets are in disarray.

"Part of the difference is that there is more evidence of how bad things are by the time the New York market opens," Crandall said.

Another factor is that the Libor banks, particularly in this environment, may not be borrowing three months out and have much more immediate overnight needs. Asking them about borrowing costs could be a "hypothetical," Crandall added.

Today's coordinated efforts by the Fed and other central banks got the job done in terms of making sure that "everyone gets funding by the end of the day," Crandall said. But, "do people have the confidence to be willing to make committments 90- and 180-days out? Not yet."