The FRA/OIS Spreads Blow Out to 2012 Levels, as Wall Street Celebrates a Rally

As all of Europe’s biggest banks plunge to new, historic, lows, the cost to swap currencies, measured by the FRA/OIS spread, hit the most extreme level since 2012. Many will blame the specter of BREXIT for this dislocation; but the European banks have been taking hits for a while now.

“There is a scarcity, similar to what happened during the Lehman event and European crisis, of dollars,” said Priya Misra, global head of interest-rate strategy at TD Securities (USA) LLC in New York, referring to the collapse of U.S. investment bank Lehman Brothers Holdings Inc. in 2008. “It might be on a smaller scale than Lehman but the essence is very similar, where you have a shortage of one currency.”

Share prices in some of Europe’s largest banks fell to record lows Thursday as the cost to insure against default on their debt rose.
Top officials from the Bank of Japan, European Central Bank and Swiss National Bank said Thursday they could provide liquidity backstops to markets to contain worsening funding stresses in the event that the U.K. votes to leave the European Union.

“These big central banks that matter now have these unlimited swap lines, and that is going to put a bound on how bad things can get,” said Zoltan Pozsar, director of U.S. economics at Credit Suisse Securities (USA) LLC in New York. “You are going to learn about the existence and the importance and the stabilizing impact of these facilities when they are tested.”

How wondrous. Oracle just beat the street. Who needs banks when we have gigantic tech companies and privately held unicorns to invest in?