Where is the ground? Investors left guessing as US and European money market rates tumble | Investment News

LONDON (Reuters) – A widely used benchmark for U.S. short-term interest rates has fallen to record lows, joining its European peers, in the latest sign that massive central bank stimulus has suppressed borrowing costs .

The three-month London Interbank Offered Rate (Libor) in US dollars hit a record high of around 0.21%
Tuesday and held near those levels in London trade on Wednesday. It is down more than 100 basis points from highs reached in March at the height of market volatility triggered by the coronavirus crisis.

Libor is a global interest rate that is the price benchmark embedded in $400 trillion worth of derivative contracts and loans worldwide.

“There is a disconnect between the spike we saw for Libor in March and the record lows we are currently experiencing,” said Antoine Bouvet, senior rates strategist at ING.

“What confuses us is that credit risk is undervalued.”

For a chart on USD LIBOR:


Interbank lending rates should reflect some credit risk, but this has been removed by the weight of central bank stimulus, analysts said, a development that was also reflected in the tightening of credit spreads. corporate bonds this year.

The transition from Libor rates to a new interest rate benchmark – the Secured Overnight Funding Rate (SOFR) – may help explain the decline when one rate converges with another.

And the move reflects the steeper fall in money market rates in major economies, triggered by the injection of liquidity into the markets by central banks to offset the impact of the coronavirus shock, analysts said.

Others noted that expectations for fiscal stimulus could also play a role.

“What you are seeing now in the US and euro money markets is that we are in an environment of extremely low market liquidity which is pushing rates down, there is no risk that we saw earlier this year “, said Jan von Gerich, chief analyst. in Nordea.

Total assets on the Fed’s balance sheet increased by just over $7 trillion as quantitative easing bond purchases approach $3.1 trillion, according to TD Securities.

In Europe, a key money market rate – the three-month Euribor – has also fallen to record lows in recent weeks amid ample liquidity the European Central Bank has released into the bloc’s financial system.

On Wednesday, this rate was set at -0.507%
in view of a record low reached last week at -0.51%.

“We all have to guess what the bottom of Libor and Euribor will be,” ING’s Bouvet said.

For a EURIBOR chart:


(Reporting by Dhara Ranasinghe; graphics by Saikat Chatterjee; editing by Karin Strohecker and Jane Merriman)

Copyright 2020 Thomson Reuters.