Treasury Action: widening Libor-OIS spread is not the early warning signal
Treasury Action: widening Libor-OIS spread is not the early warning signal of a brewing financial crisis, as it was back in 2008. Note that yields, and especially bill rates have been climbing all year. The 1-month T-bill has led the way across the Treasury complex. The updraft has also been seen in money market rates as well, while helping to push out the Libor-OIS spread to its widest since the spring of 2009. Analysts suspect much of the jump in rates, which has seen the 1-month bill climb to the 1.720% region today, from the 1.25% area in early January, has been a function of supply and Fed rate hike expectations. There has been a massive increase in bill supply in 2018 as the Treasury plans to finance much of the burgeoning budget deficit via the bills. The 1-month, 3-month, and 6-month bill volumes are all at record levels of $65 B, $51 B, and $45 B. The advent of a Fed rate hike, along with ongoing balance sheet normalization, as well as expectations for repatriation of cash after tax reform earlier in the year, are also boosting rates at the margin. Meanwhile, Libor rates have been tracking higher too, with the 3-month rate fixed at 2.25%, also 50 bps higher on the year and is at the highest since the financial crisis in 2008. Additionally, the OIS rate now sits at 1.70%, which the 1-month rate equaled today, while it's just below yesterday's 1.780% rate on the 3-month bill.