Investment Memo

The Sleepy Giant Awakens: LIBOR on the Move

For the last five years, investors have been sleeping on LIBOR. The 3 Month LIBOR rate, the most common benchmark of short term funding costs that is the reference rate for trillions of dollars of financial instruments, was within 10 basis points (bps) of 0.3% for the greater part of five years (64% of the last five years to be exact). The first meaningful increase in LIBOR since 2011 came when the Fed increased the policy rate in December 2015, but the market took little notice of the move. Since July, however, the market has become increasingly focused on LIBOR rates. So why the change of heart? To explain that, we must first delve into the underlying drivers of LIBOR.