Libor Musings

November 14th, 2008 9:06 am | by John Jansen |

What follows is the thoughts of a trader on the rise in Libor the last two days:

Libor set higher for the first time in 24 days.  The market took this as an
affront to spreads and proceeded to buy Libor/OIS pretty heavily. Why?  well,
yet again this marks a potential turning point in the credit cycle as libor has
tended to trend in a meaningful manner and more specifically, over the past few
weeks one bank has done a tremendous job in getting libor lower.  Does this
mark the end?  If this is the case, then we could be in for a wild ride over
the next few weeks.  Two days do not make a trend, but I would treat any
surprise moves higher in libor as a warning and would not fight what could
potentially be another substantial widening. Volatility will surely be higher.

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  1. 6 Responses to “Libor Musings”

  2. By M on Nov 14, 2008 | Reply

    Obvious question: which bank?

  3. By Tom Lindmark on Nov 14, 2008 | Reply

    I have a question concerning Libor.
    A few months ago there was a great deal of talk about banks misrepresenting their actual Libor cost in order to avoid embarassment. I’ve not heard anymore about that but it would seem the incentive to fudge would be even greater now.
    So, how trustworthy are the Libor numbers?

  4. By John Jansen on Nov 14, 2008 | Reply

    i think JPMorgan pushed it lower when it first began to slide.

  5. By M on Nov 14, 2008 | Reply

    JPMorgan did come in the market targeting specific (save) names like the english government backed banks and some others considered ultra save with term offers out to one year, I’ve seen that.

    As to Toms question, with no-one offering unsecured term lending and some banks desparate and willing to pay quite a lot for term Libor is nothing but an indication of where the average offer is between the banks. But if you have a look at the individual banks offers you can see the wide range of levels due to the differences in credit ratings of the banks in the panel.

  6. By SR on Nov 16, 2008 | Reply

    Arbitrage: Do some calcs on the USD vs GBP LIBOR rates, with a wholesale FX swap rate between them. You will see that borrowing 3mnth USD at LIBOR, to fund a GBP asset at LIBOR will give around a 1.5% gain………. Much better to fund your GBP assets (also most other CCY’s)with USD than GBP atm – presuming you can get acess to the USD……. Which LIBOR is correct – GBP or USD?. Last time this started to blow up to this degree was early Sep…… However this time liquidity conditions are agruably alot easier….

  7. By Tom Lindmark on Nov 17, 2008 | Reply

    Not my field of expertise here, so help me out. How much difference in credit ratings exist between the banks that set Libor? I was under the impression that they are all major players with similar ratings. Is there an informal internal rating system?

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