Libor-OIS Blowout Has Citigroup Eyeing More Negative Effects

The recent blowout in one of the financial market’s key short-term borrowing indicators may be more a product of technical factors than banking stress, but the negative effects are likely to spread as the gauge deteriorates further, according to Citigroup Inc.

Strategists at the U.S. lender predict that the gap between the London interbank offered rate for dollars and the overnight indexed swap rate will continue to widen, potentially leading to a sharper tightening of financial conditions than central bankers have been anticipating. The differential between three-month rates has already more than doubled since the end of January to 55 basis points, a level unseen since 2009.