Analysis & Comment > bond-of-the-week
Bond of the Week: 5 September 2007
LIBOR: 5 September 2007
Money market rates continue to surge higher with Tuesday’s close for 3-month LIBOR (the London Interbank Offered Rate) at 6.7975%, an eight year high and slightly above the BOE’s offer of emergency funding at 6.75%.
It is fair to say that the credit crunch is underway, and yesterday’s 6.8% rate for LIBOR should be viewed against the context of a steady 5.75% base rate. At present, LIBOR is 1% over this base rate, whilst a more normal spread might be in the region of 1/8% of a percent.
The interbank market is the first port of call for most institutional funding requirements, and this sharp increase in the cost of funding is placing considerable strain on financial institutions who have built up portfolios based on the cheap and easy funding availability seen over the past few years. Assuming the scenario continues for the next few months, here are our thoughts on tactics for fixed income investors:
*Note , FRN’s typically trade on a peer-to-peer basis between financial institutions and can be hard to access by private investors. Minimum denominations (usually £50,000) usually apply and it may be hard to deal in sizes below £1 million.
The next Bond of the Week will be published on Wednesday 19th September.
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