one-month bills currently offer a yield of 3.85% — nowhere near the 4.50% federal-funds target rate, where it usually trades. And this is at the busiest time of the year for Treasury supply, making it all the more surprising. “Liquidity in the money markets right now is very poor,” says Lou Crandall, analyst at R.H. Wrightson & Assoc.
The concerns have resulted in an ongoing increase in LIBOR, a key global benchmark that some have described as a “traded” version of federal-funds. Prior to August, it tended to track the fed-funds rate reasonably well, but has been out of line since and despite a few attempts, hasn’t come back to earth. Mr. Crandall says of late, three-month LIBOR was at 4.95% at a time when the expected funds rate continues to fall.
The difference between 3-month LIBOR and the federal-funds rate is still wide. (Source: Lehman Brothers)
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