LIBOR: Putting Out A Fire With Gasoline?

Following up on Shutdown Impacts Inflection?  Salmo Trutta reminds us of our catechisms....

Interest rates are NEVER to be misconstrued as the price of money.  Interest rates are the price of LOAN FUNDS, and the price of MONEY is reflected in indices and FX pairs.

ED has been and is still rising (higher Eurodollar contract price translates to lower cost of loan funds). As as consequence, lower ED has LIBOR suddenly dropping...

After reaching a 10-year high of 2.82375 percent on Dec. 20, three-month dollar Libor has retreated by almost 13 basis points.  Yesterday, the three-month London interbank offered rate for dollars sank 4.063 basis points to 2.697 percent, the largest one-day slide since May 2009. - Bloomberg

Unlike distorted asset prices, and central bankers who pivot from hawkish non existent wage inflation pressure to dovish patience in a matter of weeks, and a declining TED spread (more on that later), Uncle ED never tells lies. LIBOR is sinking in anticipation of what? 

"Another factor likely contributing to the reference rate’s decline is the surge of inflows into prime money-market funds, which have seen assets climb by about $36 billion since Dec. 20. Because they primarily invest in commercial paper, certificates of deposit and time deposits, which are priced off Libor, increased demand has pushed the benchmark lower." - Bloomberg

In January, 90 day USD LIBOR saw it's largest monthly decline since 2010. Something sticks out in the spin above... increased MMF demand pushing 90 day LIBOR lower?  Let's see how other key rates performed over the same period, such as the alternative SOFR.

Au contraire, an INCREASE in SOFR from 2.20 to 2.45, spiking year end to 3.15, then reverting to norm and hovering at 2.40 - 2.45.  So even though 90 day LIBOR and OVERNIGHT are for different duration and purpose, both reflect the cost of borrowed money alternatives (loan funds) and market making. 

In addition to SOFR increasing, overnight LIBOR INCREASED steady from Dec 3 = 2.18188; Jan 2 = 2.38675; Feb 7 = 2.38313; hovering in the 2.38 zone since Jan 23rd.  Also, thirty day LIBOR INCREASED steady from Dec 3 = 2.37888; Jan 2 = 2.50713; Feb 7 = 2.51688

Again, something is amiss in the MSM spin... fund inflows increased MMF demand pushing 90 day LIBOR lower?  As Marcellus quipped in Hamlet - "Something is rotten in the state of Denmark?"

More to come in A Yen For Liquidity? Or No Yen For Carry?  Stay tuned, no flippin.

If one want's prep for what's coming, read China's Dollar Swap Addiction?, Meddling With Powers? and get a healthy dose of There is Something in this More than Natural?

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Shutdown Impacts Inflection?