What's Up With LIBOR?
​Both 3-month LIBOR and the TED spread have increased steadily since July and are at post-crisis highs. What’s happening? In short, upcoming money market reforms are creating temporary turmoil in funding markets.More specifically, widely anticipated reg changes in prime funds have led to sharply less demand for commercial paper. This has pulled CP yields significantly higher and elevated funding costs for some corporates and banks.
Typically, steeply rising funding costs are an unambiguous sign of acute stress in the financial system and an early warning for a meltdown. However, that is not the case this time. The increases in LIBOR and the TED spread are due to the reg changes and will pass. Furthermore, the presence of central bank backstop dollar funding lines means it is even more unlikely temporary strains in dollar funding will lead to a systemic meltdown.
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