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Libor Creeping Higher

Posted by Larry Doyle on March 11, 2009 5:45 AM |

For those involved in the markets, very often the first rate one checks in the morning is Libor (London Interbank Offered Rate). For those not directly involved in the markets, perhaps tomorrow morning or Thursday you may start your day by asking your partner, “where’s Libor?”  In all seriousness, the 1 month and 3 month Libor rates may very well be the most closely watched indicators of market health in the world.

As Libor is the rate at which banks can borrow from each other in the London market, the rate is an indication as to the availability of dollars and the confidence banks have in each other’s credit. Traditionally, Libor tracked the Federal Funds rate (the rate at which banks borrow from the Federal Reserve) very closely.  However, on the heels of the failure of Lehman Bros. last September, the confidence banks and investors had in each other plummeted. The relationship between the Fed Funds rate and 3 month Libor blew out.  The 3 month Libor rate went as high as 4.7% from just outside 1%. Recall that at that period there was concern about money market funds “breaking the buck” amongst a whole set of other issues.

In any event, the Fed and central banks around the world have implemented a number of programs to backstop a wide swath of the market. In doing so, 3 month Libor inched back down to just above 1%, while the Fed Funds rate is now 0-.25%. Confidence was returning, funds were flowing, and all would return to normal. Or would it ?  

While the equity market had a nice 5% rally today and may follow through further tomorrow, I am actually watching Libor. This rate is critically important as it is the “oil” in the engine. Without sufficient short term funding and confidence in counterparties, the credit necessary to fuel our markets will seize up once more. 3 month Libor has inched up from 1.08% to now 1.33% over the course of the last few weeks.  This move higher is unnerving market participants.  Why?

Confidence in banks is declining. Concern about sovereign credit risks primarily in Europe is increasing. With a meeting of the G-20 countries in April, the fierce winds of protectionism and finger pointing at Europe for their lack of full monetary easing and simultaneous fiscal stimulus are heightening tensions. 

These stresses and tensions are reflected in Libor.

While the smiling faces on TV will regale you with the glad tidings of a 5% short covering rally, perhaps you may want to ask them to look under the hood and check the oil. I think we’re running low. That’s what my reading of Libor tells me. 

“Honey, how’d you sleep? Want some coffee? Hey, can you tell me where’s Libor?”

To check Libor, please access our Market Data page here at Sense on Cents and look at the Consumer Money Rates window halfway down the right hand side of the page.

Have a great day!!

LD

**Update, Bloomberg writes today how Libor’s Creep Shows Credit Markets at Risk of Seizure.






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