One of the world’s most important short-term lending benchmarks has climbed back to a level last seen before the onset of the global financial crisis in 2008.
(Bloomberg) — One of the world’s most important short-term lending benchmarks has climbed back to a level last seen before the onset of the global financial crisis in 2008.
The three-month London interbank offered rate for dollars climbed 1.5 basis points on Thursday to 4.82971%, exceeding the peak of 4.81875% it reached in October 2008 when credit markets were in disarray following the shock collapse of Lehman Brothers Holdings Inc. The last time it was higher was in 2007.
The spread of Libor over overnight index swaps — a barometer of funding pressure — was at 16.3 basis points on Thursday versus 17 basis points the prior session.
Much of the recent surge in Libor, which is set to be phased out on June 30, has been driven by expectations for Federal Reserve policy tightening. The benchmark is moving in sympathy with many other short-term rates, but there are other elements that feed into the daily setting, including the backdrop for commercial paper transactions and broader credit conditions.
“It is supposed to reflect bank funding costs,” said Priya Misra, head of global rates strategy at TD Securities. “As reserves are falling, banks are paying up for funding.”
The minutes of the December Fed meeting published this month noted that banks continued to increase their use of wholesale funding, and survey information suggested lenders expected to move deposit rates “modestly” higher in the coming months. Misra said the higher deposit rates are also consistent with higher Libor.
Most Libors around the world came to an end at the close of 2021, but regulators decided to extend the life of some dollar-denominated reference rates for an additional 18 months. A Fed-backed committee designated the Secured Overnight Financing Rate, known as SOFR, as the successor to US dollar-denominated Libor.
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