As many are well aware, Overnight Libor has spiked to extremely high levels multiple times over the last few weeks. Historically, the average difference between Overnight Libor and the Fed Funds Rate has been +11 basis points. As shown in the chart below, this traditionally tight spread got extremely out of whack recently as the credit crisis caused havoc. But over the last two days, this spread has gotten back to normal levels, and Overnight Libor is currently at 1.67% versus the Fed Funds Rate of 1.50%. The stabilization of this spread is a clear indication that the credit crisis is easing, and as long as it stays tight, the unfreezing should continue.
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