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Commentary

Short term interest rates scaling new highs

LIBOR’s up to the highest level this year:

The London interbank offered rate, or Libor, that banks charge each other for such [three month] loans climbed 6 basis points to 4.21 percent today, the highest since Jan. 11, the British Bankers’ Association said. The corresponding rate for euros advanced 3 basis points to a record 5.32 percent. The Libor-OIS spread, a gauge of cash scarcity among banks, widened to a record.

The TED spread is at 3.57 – another 52 week high, which indicates severe short term funding problems.

And the NSE MIBOR – Mumbai Interbank Offer Rate – is at 17.2%. It’s at a 52 week high, and if you disregard a spike in March 2007 (to nearly 70%!) on some tax flow issues it’s close to 4 year highs.

And NBFCs are paying much higher than even MIBOR to keep themselves afloat.

Desperation has driven these firms to raise money at an unbelievable 1,000-1,800 basis points (bps) above Mibor (Mumbai inter-bank offer rate) — the benchmark rate for overnight lending, which is fixed by polling call money rates from leading banks and bond houses. On Wednesday, Mibor was quoting at 17%. This means an interest cost of 27-35% for the borrowers. “There have been some deals at even 2,000 bps over Mibor… I have not heard of such rates,” said a dealer with a large institution.

Short term interest rates going much higher than longer term rates is what they mean by “inverted yield curve”. And is usually a lead indicator to recession. This time, it’s worldwide.