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Dollar Libor at a 10-Year High Adds to Global Funding Headwinds

Dollar Libor at a 10-Year High Adds to Global Funding Headwinds

(Bloomberg) -- The global dollar benchmark rate that everyone loves to hate and which regulators have marked for extinction approached a 10-year high Wednesday, adding to strains on some emerging economies and U.S. companies alike.

The London interbank offered rate still serves as the basis for trillions of dollars in loans and floating-rate securities globally, even though its replacement is gaining traction. Steeper U.S. interbank borrowing costs risk rippling across developing economies by tightening financial conditions and forcing local-currency benchmarks higher. It’s a development that could heighten investor concern at a time when a rising dollar has sparked worries about emerging-market borrowers’ ability to repay loans in the greenback.

Three-month U.S. dollar Libor is now 2.4496 percent, the highest since November 2008. The main driver is that traders are pricing in further Federal Reserve tightening. Officials’ latest quarterly forecasts indicate another rate hike this year followed by three more in 2019.

Dollar Libor at a 10-Year High Adds to Global Funding Headwinds

“For emerging markets, the increase matters, but the direction of the dollar has had even more of an impact,” said Peter Boockvar, chief investment officer of Bleakley Financial Group. “I’m more worried about what Libor’s rise is going to do for corporate America,” especially for smaller companies that have a large share of debt linked to the benchmark.

The Bloomberg dollar index has risen about 6 percent since mid-April, and MSCI data show that emerging-market stocks have lost about 17 percent in that period.

Year-End Signal

Currency forward markets also signal dollar-funding pressures are building into year-end, when swings in lending rates are common as some dealers pull back. Climbing T-bill rates are also at work, with the Treasury increasing bill issuance again.

So far, the rise in dollar Libor has been mainly a result of the outlook for the fed fund rate, rather than perceived credit risks, said Scott Peng, chief executive officer of Advocate Capital Management. In his former role as head of U.S. interest-rate strategy at Citigroup Inc., Peng brought global attention to how banks were misstating the rate during the financial crisis.

Here’s one sign that it’s not about credit now -- unlike earlier in the year: Libor’s spread above overnight index swaps, which are priced off the fund rate’s path, is close to a 10-month low. In April, the gap surged to its highest since 2009.

For some analysts, this story is just beginning. JPMorgan Chase & Co. strategists expects three-month Libor to end the first quarter at 3.1 percent and be at 3.25 percent three months later.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum, Elizabeth Stanton

©2018 Bloomberg L.P.