Curve Watchers Anonymous is once again watching the yield curve and mortgage rates. In addition, it has close eyes on LIBOR rates.

Although the moves are small, yields are rising on the short end and falling on the long end. In addition, 10 year yields have broken 4.00.


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Mortgage Rates Stubbornly High

Curve watchers continue to point out that mortgage rates on 30-yr fixed and 1 year ARMS are above where they were a year ago in spite of 75 basis points in cuts by the Fed.


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LIBOR Rates More Telling Than Yield Curve

LIBOR rates are where the signs of stress are. Let's take a look.


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(The above charts courtesy of Bloomberg.)

LIBOR rates are lower than they were a year ago, but take a look at the spreads between LIBOR and the Fed funds rate.

Six months ago the spread between the 1 month LIBOR and the Fed Funds Rate was a mere 7 basis points. The spread between the 3 month LIBOR and the Fed Funds Rate was a mere 11 basis points.

Today, the spreads are 30 basis points and 55 basis points respectively. They are also headed the wrong way compared to a month ago.

This is a sign that banks are reluctant to lend overnight to one another. They are holding onto cash and treasuries, which is driving up costs of overnight lending. Real cash is in short supply.

The situation is worse in Europe with the ECB set to pump cash into money markets over liquidity concerns. Another sign of stress is talk about intervention in the Euro to help exports.

I discussed those topics over the weekend in European Credit Markets Deteriorate Dramatically and Currency Twilight Zone. Inquiring minds may wish to take a look.