Global Fixed Income Strategy Apr 2018

Monthly insights and updates from the Invesco Fixed Income team.

Apr 30, 2018 | Invesco Fixed Income

The widely quoted benchmark rate is now at post-crisis highs
The last time we wrote about the US dollar London lnterbank Offered Rate (LIBOR) was in 2016, when the spread between LIBOR and the Overnight Indexed Swap (OIS) rate increased due to market dislocations leading up to US money market fund reform. Now in early 2018, we have seen LIBOR rates rise and LIBOR-OIS spreads widen again, causing us to ask the same question — what’s up with LIBOR?

In our opinion, there are four factors driving LIBOR rates higher:

  • The US Federal Reserve (Fed) has continued to push monetary policy rates higher with its latest hike in March.
  • Demand has fallen for short-term credit instruments due to potential corporate repatriation following last year’s tax reform.
  • The BEAT provision of US tax reform has increased the issuance of short-term funding instruments from US branches of foreign banks, to avoid new taxes on cross-border intra-company lending.
  • Given projected budget deficits, markets expect an abundant supply of US Treasury bills (T-bills) through 2019.

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