Diet Caffeine Free Lehman

I received several phone calls and a couple of e-mails yesterday concerning a possible Lehman Bros. type event in the credit markets. The European web of sovereign and bank debt jumped to everyone's front burner. While most focused on the strong rebound demand for US Treasuries, Eurodollar rates for 2011 rose in futures markets.

A new record low print for 3 month LIBOR last week. Eurodollar futures for Sep 2011 fell 5 basis points yesterday and are down again as of this post. More of an "homage" to days of yore when money rates meant something than the 400 bp run during Lehman, the move is at least a minor recognition of reality. The action has compressed relationships into 2012 from an already tight spread.

Next week the FOMC meets and Big Ben will hold his second presser. "On hold forever" is well accepted in market structures now. The Fed - or The Chairman - may have to tweak it central tendency forecasts, however. An adjustment lower will intensify already heated critics of QE. For now, we would say that there is no actual problem sourcing dollars for even the most crippled institutions. Sourcing Euros is more expensive but also abundant. Fears of Lehman credit market freeze and break are part wishful thinking and part misunderstanding. Things are screwed up and delicate all around the globe. Some are just figuring it out.

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