The recent auctions by the Fed and Bank of England show that the liquidity squeeze banks were suffering in December is easing, dramatically.
In December when the Fed held two auctions, both were oversubscribed and and ended with interest rate of 4.65% and 4.67%, above the Fed funds rate. When the Bank of England auctioned funds n December, the rate ended up being 5.95%, well over the 5.5% base rate at the time.
This is in direct contrast to the most recent auctions at both institutions. The US Fed saw demand for the funds drop precipitously and the interest rate fell to 3.95%, 30 points below the target fed funds rate. In England, the recent auction went out at 5.28%, 22 points below the current rate.
In short, banks are not clamoring and desperate for funds like they were in December. Part of this is due to recent foreign investment in the sector in Citigroup (C), JP Morgan (JPM), Merrill Lynch (MER) and others. It would also seem that banks are beginning to get a handle on what is what on their books as compared to December when people though it all might be bad.
While admittedly this does not mean the pain is gone and things are rosy, it does mean that the downward spiral we have been in for financials is leveling out. It will most likely bottoming here and will sit for a time until there is clarification that things are looking more rosy.
Disclosure: Long Citi, none in others
