NEW YORK–Credit union CFOs are likely going to want to pay closer attention to an index that may have fallen off their radar.
One CU chief investment officer even said he has been “buying all kinds of floating-rate instruments” tied to the index as a result of changing conditions.
In what some are calling “Libor’s Revenge,” the London Interbank Offered Rate has suddenly taken a big jump. For three-month debt, it’s risen to 2.29%, the highest level since 2008, after hovering near 0% for an extended period.
Libor, the rate at which banks loan money to each other, was targeted for replacement by critics after regulators found it was rigged by insiders a decade ago. But it remains a benchmark, with an estimated $350 trillion worth of assets pegged to it, according to Bloomberg, and it remains the baseline for many bonds, business loans, and mortgages.
For homeowners with adjustable mortgages, the Libor increase may mean higher payments, noted Bloomberg, and could also create a “double whammy” as it causes companies’ borrowing costs to increase and lowers the discounted value of their future earnings.
“It can drive stock prices lower and send money fleeing mutual funds and into safer assets,” Bloomberg quoted strategists at Citigroup as saying. “That’s a spiral that can cause headwinds for the wider economy. At the very least, Libor’s lurch upward amounts to a further tightening of financial conditions at a time when the Federal Reserve is already raising its own benchmark rate.”
Bloomberg noted that the Fed’s moves aren’t the sole reason for the increase in Libor. Instead, other changes in the bond market have played a factor, as a deluge of Treasury bills have crowded out commercial paper, Bloomberg reported.
“To entice investors to buy those debts, companies selling commercial paper have to offer higher rates. Those higher rates ultimately feed into Libor,” said the Bloomberg analysis. “Because of a dearth of interbank transactions, banks increasingly use commercial paper rates to guide their submissions to the survey used to calculate Libor,” one analyst noted. In addition, the new tax reform has led some big, cash-rich companies to repatriate earnings and as they liquidate overseas cash piles they want access to the funds immediately for stock buybacks, dividends, or further investment in the business.
Bloomberg quoted Chris Sullivan, chief investment officer at the United Nations FCU in New York, as saying he’s been loading up on adjustable-rate securities that profit from Libor’s rise. He said he sees no credit event brewing, since U.S. banks have ample capital buffers.
“We have been buying all kinds of floating-rate instruments tied to Libor, which has been a pretty favorable thing to do,” Bloomberg quoted Sullivan as saying. “Perhaps we haven’t considered seriously enough what that could mean in the future, when Libor is replaced. But the future in my mind is still some years away.”