The Eurodollar upshoot: LOIS widens

EFF is down. But LIBOR is up. The difference between Fed Funds and Eurodollar has once again showed itself up, like it did in the 2008 crisis.

Firstly, EFF being down is because of one of these two reasons: simple people think its because of the Fed interventions. Cynics think it is because banks are chosing not to lend to 'dangreous' banks at all (EFF is the weighted avg of actual transactions that take place in the market). They think LIBOR is different as it is calculated by asking bankers - What is the rate at which you would lend IF you had to?

Now, the LIBOR upshoot can be explained in the following ways:

Reason 1

CP market is the cash market for unsecured funding (although it hardly has any real volumes going through) and it is broken right now - which made the Fed introduce the CPFF which would eventually solve some of the problems there. SOFR already was getting help through the OMOs.

Reason 2

Huge demand for cash, given the nature of the credit event. So an unsecured rate will obviously shoot up.

Reason 3

The alleged silly LIBOR fixing loop. Eurodollar fixing a higher rate due to elevated LOIS (or CP issue), and this ED rate being used by bankers for fixing the LIBOR!!

Reason 4:

System has too much leverage. So collateralized programs by the Fed don't help it. This is showing as pressure on unsecured cash (LIBOR).