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Libor a Sign of Rate Speculation, Risk Trends or Regulation?

Libor a Sign of Rate Speculation, Risk Trends or Regulation?

2016-09-13 02:34:00
John Kicklighter, Chief Strategist

Talking Points:

  • The benchmark 3-month US Libor rate has advanced to a more-than-seven-year high of 0.84 percent
  • Libor is used as a pricing benchmark for approximately $300 trillion in securities globally
  • This pivotal financial asset represents a gauge for growth outlook, rate forecasts, liquidity gauge and regulations

See how retail traders are positioning in the majors using SSI readings on DailyFX's sentiment page.

Though it does not break the list of top assets traders like to weigh in on daily (like Dollar, S&P 500, oil prices and VIX), the US Libor rate is one of the most crucial pieces in the financial system. As a benchmark for a range of the most ubiquitous assets, the fluctuations and trends of the Libor rate can stand as a barometer for a range of critical market and financial system measures including risk trends, Fed forecasts and liquidity problems. Given the importance of this fundamental pace setter, what are we to conclude from its rise to seven-plus year highs? Is this a leading indicator of Fed rate speculation when measures like the Dollar, Fed Fund futures and Treasury yields have corrected? Or perhaps is there a deeper theme at play.

Ultimately, it is impossible to separate the many fundamental influences that factor into such a liquid and centralized asset. However, beyond the December rate hike realized in 2015 and the lingering speculation of another move sometime through the foreseeable future; there is little reason to believe this measure provides a signal of impending against all the fundamental and speculative evidence available otherwise. Alternatively, it is an indisputable reflection of the rising costs of short-term lending in the open market. In large part, this rise is a response to money market funds moving over to Treasury holdings to avoid a SEC regulation that goes into effect on October 14. While the rate may peak after that transition is absorbed, the higher cost for US funds exudes an important market influence. In a market stretched for its reach-for-yeild and heavily exposed to borrowed funds, such considerations can carry a more important and lasting influence on the financial system. We discuss the important and impact of the Libor rate in today's Strategy Video.

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