In my post Libor Too High or Fed Funds Too Low?, I suggested a way that the market might begin to function again:

How is the Fed going to get out of this? The only way I can see to get this market functioning again is for some large bank to offer to lend a huge amount at the Fed funds rate. If JP Morgan were to enter the market and offer to lend at a low rate, it might restore some confidence and get other banks in the market. With the entire banking system being essentially guaranteed by the world’s governments, the risk to lenders is low.

Today from the WSJ:

NEW YORK — Signs pointing to a hefty drop in a key interbank lending rate Monday pulled the flight to safety bid out of the government bond market Friday.

Trading Friday indicated that three-month Libor, a benchmark for corporate and consumer borrowing, could be fixed around 3.103% Monday in London, down from Friday’s 4.418% rate. The move was driven by reports that J.P. Morgan Chase had lent out a large amount of three-month funds. A person familiar with the matter said that J.P. Morgan lent between $10 billion and $15 billion to mostly European banks Friday morning in overnight to one-month loans, and some with longer maturities. Interest rates on these loans ranged from 3% to 4.5%.

That sparked a big selloff in three-month Treasury bills, investors’ safe-haven of choice during the recent market strains. The annualized yield rose 36 basis points to 0.80%. One-month bill yields shot up to 0.88%, according to Tradeweb, an electronic trading platform.

Is someone over at the Fed reading this blog? Hellooooo…..

Anyway, the credit markets did improve a bit today. 3 Month LIBOR is starting to drop, but it’s still higher than it should be. This market will not be back to normal until the Fed is out of the market. TAF needs to end as soon as possible. If banks don’t have a choice, they’ll go to the interbank market and pay the market rate. If there is enough demand, and there will be, the price (rate) will drop. Amazing how markets work isn’t it? The Fed should start reducing the size of the auctions soon. As soon as we see an auction that isn’t fuly subscribed we’ll know things are winding down. I have no idea how long that will take but it doesn’t seem imminent.