Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Libor’s Climb Past 2% is Unnerving Some Investors

Posted by hkarner - 5. März 2018

Date: 04-03-2018
Source: The Wall Street Journal

A benchmark used to set borrowing costs on trillions of dollars worth of loans is on the rise, stirring concerns about the effect of higher U.S. interest rates on consumers and businesses.

The three-month U.S. dollar London Interbank Offered Rate, or Libor, surpassed 2% this week for the first time since 2008. That will lift rates on more than $100 trillion in debt and derivative contracts that are linked to the U.S. benchmark, from business and student loans to home mortgages.

Libor has been rising for the last two years as the Federal Reserve has tightened interest rates. But gains have accelerated in recent months, according to RBC Capital Markets strategist Michael Cloherty, because of changes to the U.S. tax code that have encouraged companies to reshuffle bond holdings.

One recent source of worry among strategists and investors has been the growing gap between Libor, which is set amongst banks, and the overnight index swap rate, which is determined by central bank rates. That spread has widened sharply recently and this week was at its highest level since 2009.

Back then, the sudden widening in the Libor-OIS spread signaled mounting stress within the financial system as a liquidity crunch made it more expensive for banks to lend to each other.

Many analysts are downplaying the rise in Libor. As the chart above shows, the Libor-OIS spread remains modest in comparison to its financial crisis levels, while overall borrowing costs remain historically low and debt levels don’t yet appear troubling.

Still, some consumers and borrowers are likely to feel the sting of rising borrowing costs. Many types of debt pay interest that floats based on the level of Libor, which means a higher rate increases borrowing costs. Higher rates also act as an implicit form of monetary tightening, which could complicate the Fed’s plans to raise rates this year without fueling market volatility or hampering economic growth and inflation.

“It does increase some people’s borrowing costs, but the difference is that back in 2007, you had a lot of wildly over-levered consumers and businesses,” said Mr. Cloherty. “At this point we don’t have the same over-levered problem. The increase we’ve seen in Libor isn’t going to meaningfully change the economic outlook.”

Rising rates can be particularly painful for heavily indebted companies. UBS this week estimated that there are more than $2 trillion in junk-rated loans that are likely to be hurt by higher rates.

“We are primarily concerned with the estimated $1.1 trillion of loans…extended to issuers rated below BB,” UBS analysts wrote. “This debt will be most directly impacted by a rapid increase in the Fed Funds and 3-month LIBOR rates.”

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