Invesco Writes on LIBOR Spike
Invesco blogs "What's up with US dollar LIBOR?" They tell us, "The last time we wrote about the US dollar London lnterbank Offered Rate (LIBOR) was in 2016, when the spread between LIBOR and the Overnight Indexed Swap (OIS) rate increased due to market dislocations leading up to US money market fund reform. Now in early 2018, we have seen LIBOR rates rise and LIBOR-OIS spreads widen again, causing us to ask the same question -- what's up with LIBOR? In our opinion, there are three factors driving LIBOR rates higher: The US Federal Reserve (Fed) has continued to push monetary policy rates higher with its latest hike in March. Demand has fallen for short-term credit instruments due to potential corporate repatriation following last year's tax reform. Given projected budget deficits, markets expect an abundant supply of US Treasury bills (T-bills) through 2019." The piece asks, "What is LIBOR?" Author Rob Corner tells us, "LIBOR is a benchmark rate that some of the world's leading banks charge each other for short-term, unsecured loans. Globally, it is considered a primary benchmark for short-term interest rates. LIBOR is also used as a barometer to gauge market expectations of future central bank policy and for measuring the health of the banking system." He adds, "Invesco Fixed Income views the increase in LIBOR and the jump in the LIBOR-OIS spread as an opportunity. We believe short-term investment strategies may stand to benefit from higher LIBOR rates and a wider LIBOR-OIS spread. First, prime money market funds (which rely on short-term funding markets) have already benefited as yields of these types of funds have increased.... Second, ultrashort bond funds and exchange traded funds (ETFs) that invest in LIBOR-based floating-rate securities could benefit as coupons potentially reset higher. Additionally, short-term products such as securities lending cash reinvestment pools, local government investment pools, offshore US dollar money market funds and certain separate accounts could stand to benefit."
