Libor-OIS spread drops to Greenspan's level

The Libor-OIS spread narrowed to a level former Federal Reserve Chairman Alan Greenspan said he regarded as “normal,” adding to evidence the freeze in credit markets is thawing.

The spread, which gauges the reluctance among banks to lend, fell 1 basis point to 25 basis points today, the least since January 24, 2008. The spread soared to 364 basis points on October 10 last year after Lehman Brothers Holdings Inc.’s collapse in September. Greenspan said in a June 2008 interview he wouldn’t consider credit markets back to “normal” until the spread was at 25 basis points. Financial markets “improved further in recent weeks,” the Fed said yesterday.

“It certainly is good news and indicates that some normality is returning, at least in prices,” said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking unit of Credit Agricole SA. “It backs up what the Fed said last night. Everything seems to be going well at the moment.”

Financial institutions are becoming less wary of lending after central banks around the world cut interest rates to near zero and offered unlimited funds to unlock credit. US authorities pledged $12.8 trillion in an attempt to revive credit markets and combat a recession that has cost financial companies $1.6 trillion in writedowns and losses.

The Libor-OIS spread measures the premium banks charge over what traders predict the Fed’s daily effective federal funds rate will average over the next three months. It averaged 11 basis points in the five years to August 2007, when credit markets began seizing up.