FIXED INCOME MONTHLY

What lies behind the
rise in LIBOR

Aug 3, 2016 / By Jeffrey Rosenberg

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.

 


Fixed income highlights

  • The London Interbank Offered Rate (LIBOR) is on the rise, but not for the usual reasons. Investors face increases in LIBOR on both sides of their balance sheet, and retail investor exposure to LIBOR leads many to question the recent increases. Retail investors face lower direct exposure on the asset side, but for global bond markets we highlight several notable spillover effects.
  • The long-anticipated money market reform leads to increases in LIBOR. Normally, increases in LIBOR are associated with Federal Reserve (Fed) policy rates and expectations or concerns over bank credit quality. The recent increases in LIBOR, however, appear more related to the impact of impending money market reforms.
  • Return to divergencesThough yen strength at the end of July eroded much of its monthlong rally, the dollar bears watching as rising expectations for Fed normalization, coupled with more accommodative global central bank policy, could resurface previous concerns of weaker commodity prices and risky assets.

Strategy and outlook

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.

Jeffrey Rosenberg
Chief Investment Strategist for Fixed Income
Jeffrey Rosenberg, Managing Director and BlackRock's Chief Investment Strategist for Fixed Income, is responsible for developing BlackRock's strategic and tactical views on sector allocation within fixed income, currencies and commodities.
Jeffrey Rosenberg
Chief Investment Strategist for Fixed Income
Jeffrey Rosenberg, Managing Director and BlackRock's Chief Investment Strategist for Fixed Income, is responsible for developing BlackRock's strategic and tactical views on sector allocation within fixed income, currencies and commodities.