Libor

757 Words 4 Pages
Gaining a basic understanding of finance can be difficult given the number of complex details and caveats that make up the markets. For this reason, some of the most important concepts often go overlooked or misunderstood, one of those being Libor (London inter-bank offered rate). The rate is widely considered the primary benchmark in finance upon which trillions of dollars of contracts are exchanged.

Libor is a money market interest rate which banks and financial institutions use as a yardstick for borrowing from one another. It is determined each morning from a survey of 11 to 17 leading banks which asks them to estimate a rate they would be willing to pay to borrow money on a short term basis from another institution. Rates are produced
…show more content…
During the recession, rates spiked over concerns that short term lending to distressed financial institutions would backfire. The latest move though has less to do with financial institutions and more to do with new regulatory changes on U.S. money market funds that went into effect in mid-October. The reform requires funds to move from a $1 fixed net asset value (NAV) to a floating NAV along with adopting liquidity fees and redemption gates. These measures have been put in place to safeguard against a repeat of the crisis, which was met with massive outflows and one prominent money market fund “breaking the buck”, dipping below a $1 …show more content…
A move higher makes it increasingly more difficult and expensive for companies to facilitate growth initiatives through borrowing funds, thereby stunting near term earnings potential. Weak fundamentals are just one of many reasons that investors punish stocks and drive prices lower. Some experts recommend hedging against this risk with leverage loan funds or Libor based floating rate funds such as Powershares Senior Portfolio ETF (BLKN). Other options include REITs which have a large percentage of their assets in variable rate loans that benefit with a rise in Libor. Although a higher Libor rate should theoretically drag down the market, many other factors come into play to determine share prices.

An overhaul in the money market industry followed by an increase in Libor rates has evoked shades of the 2008 global financial crisis. But today’s jump is not a signal of credit stress in the financial sector, rather a changing regulatory environment. The new regulations imposed by the SEC have subsequently put pressure on prime money market funds and financial insitutions but also individual borrowers with floating rate debt. That said, the situation brewing in the markets is a sign of greater future investment opportunities as opposed to upcoming

Related Documents