WSJ Blog on Libor Creeping Higher
The Wall Street Journal featured a post entitled, "Libor Has Been Creeping Higher." It says, "An early warning signal for financial distress has been starting to flash. But that doesn't mean a crisis will follow. The London Interbank Offered Rate, or Libor, measures the cost of short-term interbank borrowing. It spiked during the financial crisis a bankers grew worried about the health of other banks. Now, the three-month U.S. dollar Libor rate is rising again. It climbed 0.08 percentage points since the end of last month, and 0.05 percentage points since July 18, to 0.734% on Monday, its highest since 2009, according to SIX Financial.... Analysts say the rise is not a harbinger of another financial crisis this time–at least now right now. Rather, it's a series of regulations that will go into affect in October, making it less attractive for money market funds to hold some of short-term securities often issued by banks as an alternative to funding on the interbank market. When demand for those securities falls, it can push up the price of Libor funding. New Securities and Exchange Commission rules will require that prime institutional money-market funds that hold short-term corporate debt have to allow their share prices to fluctuate. The funds will also be able to suspend redemptions or add liquidity fees for investors that pull out their money when markets are volatile. That's a response to the financial crisis, when the Reserve Primary Fund's net asset value dropped below $1 a share. The rules are also reshaping the market, driving investors out of prime funds and into money market funds that hold government debt. In just the past week, about $30 billion has shifted from one to the other, according to Credit Suisse. On top of that, many prime funds are reducing their average maturities to avoid volatility around the October 14th implementation date, which means forgoing a small amount of additional yield for the sake of stability.... Last week marked 90 days until the rules take effect, meaning that the three-month commercial paper and corporate certificates of deposit to which Libor is closely linked now come due after the implementation date, according to Citigroup. That's made prime funds hesitant to purchase debt due on the other side of the effective date, a trend that analysts say is likely to continue. "We expect the spread to go even wider from here before the October reform date," wrote Citigroup analyst Steve Kang. Still, with waning demand for commercial paper forcing issuers to offer buyers higher rates, some yield-starved investors sense opportunity. Ninh Chung, head of investment strategy and portfolio management at SVB Asset Management, said last month that his firm had recently found commercial paper to be a more attractive buy. "Issuers want to attract new investors as money market reform takes place," he said." See too Bloomberg's "This Is Why Libor's Moving Higher: Money market reform sends bank borrowing rates to a post-crisis high".
