The Fed isn't the only thing affecting LIBOR rates today. Impending money market reform has a role to play. Jeff Rosenberg discusses the implications for both U.S. and foreign investors.
Higher short-term borrowing rates reflect mainly a near-term technical issue surrounding money market reform. Those pressures likely last through the fall, and effectively raise the costs of foreigners accessing the U.S. market. That may lead to a short-term reduction in foreign support for both longer-maturity bonds and credit in the U.S. More broadly, the Fed’s dropping of “near-term risks” in its July Federal Open Market Committee (FOMC) statement contributes to the return of “divergences” as a macro theme. The long expected resumption of the Fed’s normalization path and its impact on the dollar bears close watching. Prior episodes led to significant concerns across the commodity, inflation and risky asset spaces. Though recent declines in oil appear supply driven, we also see measurable signs of a stronger dollar feeding into lower oil prices. Tactically, that leads us to downgrade risk exposures a bit for August, though with no significant overall changes to portfolio sector recommendations.
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