LIBOR Hits A New Low

3 month LIBOR fell for a 20th straight day today, to 1.05375%, down 1.875 basis points from Friday and to its lowest level since June 2003.

The decrease largely reflects the generous liquidity injections by the world's central banks as well as a reduction in anxieties regarding counter-party risks. Further decreases in LIBOR are likely.

Importantly, at 80.5375 basis points, the spread between three-month LIBOR and the federal funds rate is for the first time at its pre-Lehman level. Historically, a spread of closer to 12.5 to 25 basis points was normal. Although for obvious reasons the spread is not likely to return to those levels, upcoming declines will occur largely in response to a further expansion of the Federal Reserve's balance sheet, which has the effect of boosting the amount of money available in the inter-bank system.

Other money market rates are following LIBOR lower. For example, the rate for 90-day asset-backed commercial paper is today at 0.98%, its lowest since January and well below the peak of 6.18% last September.

LIBOR's decline is of course important to those with debts tied to it. The decline is important also because it signals stabilization in the money market and in risk attitudes. Good for equities? (After this swine flu nonsense is put away?)