The so-called FRA-OIS spread, which measures the spread between the U.S. three-month forward interest rate and the overnight index swap rate, rose to 29.50 basis points on Thursday, its widest cart since May 23, according to Refinitiv data. The measure was -11.66 basis points earlier in the week.
Widely considered an indicator of banking sector risk, a higher spread reflects an increase in the risk associated with interbank lending.
“The recent spike in the spread between the forward rate contract and the overnight index swap rate is concerning,” said Jordan Jackson, global market strategist at JP Morgan Asset Management. “As the Fed becomes more hawkish, concerns about the recession increase, which increases underlying credit risk.”
The Fed raised rates by 75 basis points on Wednesday, its biggest hike since 1994, and expectations of more drastic tightening to come have rattled markets and heightened worries about a possible recession.
This month, the central bank also began allowing bonds to come off its balance sheet of more than $8 trillion without replacing them, a process called quantitative tightening which Mr Jackson said can potentially undermine liquidity in the market. financial system.
This echoes the concerns of some other investors, who feared that market conditions could deteriorate as the world’s largest holder of US government debt reduces its presence in the market.
“Now that quantitative tightening has officially begun, we’ve seen a fairly persistent reserve drain over the past few months,” Jackson said, adding that he expects the FRA-OIS gap to widen further. any further.
Wall Bourse also notes an increased risk of failure of the major banks.
Spreads on credit default swaps (CDS) from JP Morgan, Goldman Sachs, Morgan Stanley, Citigroup, Wells Fargo and Bank of America were approaching new two-year highs on Thursday.