“Baked In The Cake” – Why LIBOR’s Blowout Has Already Done Its Damage

The global funding market crisis is getting worse and its contagion is starting to show up in assets that ‘mom and pop’ care about. Bank stocks are being battered…

Following bank credit risk’s spike…

And European High Yield risk has exploded to one-year highs…

European stress is worse than US for now, as Charlie Diebel, head of rates at Aviva Investors, notes:

“The longer it [LIBOR-OIS increase] goes on, the more pronounced the effects are going to be…

It complicates the efforts of policymakers because in Europe we still have QE (quantitative easing), but we have some sort of tightening coming at the same time.”

And Investment Grade credit risk is soaring to six-month wides in EU and US…

Simply put, LIBOR doesn’t need to blow out anymore for the pain to emerge…

As one veteran credit-trader exclaimed: the bank credit pain “is baked in the cake” as the lagged reaction to short-term funding needs (and soaring costs) creeps into those so-called fortress balance sheets.