When Credit Markets Challenge the US Economy, Libor is the Rate to Watch

When credit markets challenge the US economy, Libor is the rate to watch. The London Interbank Offered Rate is the rate at which banks borrow from each other in the London interbank market. This rate is established by a survey of market activity among a select group of banks and released daily after 11 am London time. Libor is calculated for maturities ranging from overnight to 12 months across ten currencies, including the US dollar.

Why does it matter to Dallas businesses?

Libor has become the standard for short term interest rates globally. In the US, Libor is used as a benchmark for loans as varied as credit lines for routine business operations, adjustable home mortgages and student loans.

Libor is, also, the best way to take the pulse of credit markets. Unlike the Dow Jones and other stock indexes, Libor directly reflects the cost of money, revealing key attitudes, behavior and expectations among the largest banking institutions worldwide.

And, the Libor is rising.

While US stock markets waxed and waned at the end of September, overnight Libor rates for the US dollar posted their greatest spike in history, bolting from 2.57 to 6.88 percent in one day, before relaxing to 3.79 as a new quarter opened on Oct 1. However, as the volatile overnight rates unwind, the monthly, quarterly and annual Libor are on a steady climb, sending a clear message that credit markets are in an escalating crisis of confidence.

Libor data is not freely available at the time of release. It is published the following day in the Wall Street Journal (WSJ) and can be found on the WSJ market data center under “money rates” for one, three, six and 12 month maturities. All Libor rates are freely available with a seven-day delay at the British Bankers’ Association (BBA) Libor and other websites, such as Economagic (www.economagic.com/libor.htm).