October 9th, 2008 7:04 am | by John Jansen |


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  1. 10 Responses to “Libor”

  2. By Chris on Oct 9, 2008 | Reply

    There are some comments going round, from you and on other blogs, of people starting to think about putting on some risk again… Do you think this will be unaffected by the fact that dollar rates are higher again? ie, is the money market disconnecting from the other markets?

  3. By John Jansen on Oct 9, 2008 | Reply

    I think the fact that the money markets remain a very stressed venue will temper the enthusiasm today and will motivate investors to watch rather than plunge in.

  4. By Singapore Don on Oct 9, 2008 | Reply

    The LIBOR fixing that happens at 11 am in London under BBA auspicies is a curious beast. The reporting banks (12 I think) post rates at which they are willing to lend or borrow for different maturities to /from other banks. A few monhths ago, there was some hue and cry when some banks were trying to game the system by posting lower rates than rates at which they were borrowing form other banks. I think UBS and Citi were named, but I am not sure. Anyway, the argument was that they intentionally posted lower rates to BBA otherwise the market would find out that they had trouble borrowing and had to pay rates higher than the BBA fixings

    Gordon Brown has now effectivley said that I will, for a guarantee fee, step between two banks for their 3 month lending. So say if Barclays wants to lend to HSBC, instead of the lending being at the quoted LIBOR, it will be the UK govt borrowing rate plus the guarantee fee which wont be too big I am sure. So effectively LIBOR will become irrelevant as the rate at which the banks lend to each other.

    The big problem is that LIBOR is used in all swaps, and a lot of other financial contracts, like mortgages, as the reference rate. So even if the real rate at which banks in London are lending to each other comes down with the Gordon Brown guarantee, if the banks keeep on posting higher rates to BBA, all these other contracts will keep on pricing at an articially higher LIBOR rate.

    I dont know for sure, but my gut tells me that most banks have more assets than liabilities priced off LIBOR, so for them to have LIBOR as high as possible is a good thing, and they may want to keep up with this pretence of posting higher LIBORs to BBA going on as long as they can.

  5. By MW on Oct 9, 2008 | Reply

    1. Number of reporting banks depends on the currency.
    2. LIBOR is calculated on a “trimmed mean” basis.
    See here

  6. By MW on Oct 9, 2008 | Reply

    Mortgage rates are set off 3m or 6m LIBOR. Banks aren’t borrowing term, unless it’s from the CB (AFAIK, any interbank lending is O/N or 1w right now). Anyway, the UK has almost entirely fixed rate mortgage market…

  7. By Singapore Don on Oct 9, 2008 | Reply

    MW,points noted. Most interest rate derivatives like swaps and options are referenced to 3 or 6 month LIBOR. I know that in the UK LIBOR is not used in pricing mortgages, but I understand many mortgages in the US are priced off LIBOR.

  8. By Alex on Oct 9, 2008 | Reply

    Variable rate mortgage customers benefited immediately. At this juncture it would appear that LIBOR rates are irrelevant to them.

    Interest rate cut: joy for 5m homeowners

  9. By liverless on Oct 9, 2008 | Reply

    Can you explain to some of us uneducated folks what would cause the rise in libor at the same time as the fall in longer dated spreads? Isn’t one suggesting less risk and the other saying more? Which do you believe?

  10. By John Jansen on Oct 9, 2008 | Reply

    I think that the markets are in the midst of truly historic upheaval. I also think that the coordinated rate cuts as well as the Fed action to support the Commercial paper market will over time stabilize the situation. It took years for the problem to develop. We have been emeshed in it for 14 months. It will take quite some time for the markets to return to a modicum of normality. (Take that Warren Harding.)

  11. By Alex on Oct 9, 2008 | Reply

    Enmeshed — I like that word, describes it perfectly.

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