The Libor-OIS spread, a closely watched metric showing stress in the interbank lending market, has returned to pre-crisis levels as financial markets' coronavirus-related anxiety dissipates.
The spread measures the difference between the three-month dollar London interbank offered rate, the average cost for banks to borrow from each other, and the overnight indexed swap rate, or OIS. It was 38.53 basis points as of May 6, the lowest level since March 10 before widespread social distancing measures began to be imposed across the U.S.
The measure touched this year's low of 12.75 basis points Feb. 20 and averaged 24.90 in the 12 months through the end of February.
Amid concern that the demand shock from the measures to control the coronavirus outbreak could herald a financial crisis, Libor-OIS had stretched to 138.68 bps by March 27 before extensive intervention the Federal Reserve did much to calm investors' nerves.
"Futures indicate Libor-OIS will settle in the mid-20 bp range for much of the rest of the year," BMO Capital Markets wrote in a research note. "Even in normal times free of financial market stress, Libor-OIS rarely sets below 15-20 bp."
Credit markets continued to narrow gradually with the spread in the U.S. investment-grade sector falling from 305 bps to 217 bps over the course of April, rising slightly to 220 bps as of May 4.
"The Fed has unequivocally succeeded in stabilizing the U.S. corporate bond markets," Win Thin, global head of currency strategy at Brown Brothers Harriman, said in a report.
The U.S. high yield spread has been slightly more volatile. Having climbed from 731 bps on April 17 to 802 bps on April 28, it appeared to be following the investment-grade market, contracting back to 763 bps on April 30. The number had risen back to 779 bps by the close of May 4.
The percentage of companies priced below 80.0 on the LCD U.S. leveraged loan index remains flat, with the ratio of 17.24% by the close of May 5 little changed previous weeks, having fallen from a peak of 56.78% on March 23 to 17% on April 17. There were 11 defaults from loan issuers in April, the most ever during a month, exceeding the previous record of 10 in October 2009, in the wake of the last major financial crisis, according to the S&P/LSTA Index.