Libor Rates Surging: What Does It Mean?

Mar. 13, 2018 8:09 AM ETSPDR S&P 500 Trust ETF (SPY)42 Comments


  • 3-month Libor rates have surged over 2%, the highest since 2008.
  • Libor rates reached cycle highs across all durations.
  • The Libor-OIS spread, a key indicator of short-term liquidity and credit risk is soaring.
  • Are Libor rates surging due to true underlying economic weakness or is this something more benign?

Libor Rates Surging On Top Of Mounting Debt

Libor (London Inter-Bank Offered Rate) is the average interest rate estimated by each of the lending banks in London that it would be charged were it to borrow from other banks. As short-term interest rates rise, of course, the overnight rate will rise as well. A rising Libor rate is two-fold, however. A rising Libor rate can also indicate tightening credit and liquidity conditions. Banks are less willing to lend out overnight loans as market risks elevate.

With that said, the Libor rates from the 1-week to the 12-month duration can be seen at the highest of the economic cycle. I am not a market technician and do not believe in trend lines and similar technical data points but I would be remiss not to show the long-term chart of the Libor rates without the long-term trend line.

Libor Rates:

Source: YCharts, EPB Macro Research

Each economic cycle shows a lower peak in Libor rates, similar to the Federal Funds rates, the 10-year Treasury rates, the nominal GDP growth rate and the inflation rate. All of these factors are correlated.

As the chart below shows, the Libor rates are at the highest since 2008.

Libor Rates:Source: YCharts, EPB Macro Research

The major issue with rising Libor rates is the increased debt service cost incurred by loans linked to Libor. The Telegraph reported that "A third of all US business loans are linked to Libor, as are most student loans, and 90pc of the leveraged loan market."

With an economy overloaded with debts, most of which are linked to Libor, it is not surprising that a rise in Libor rates and short-term interest rates precedes the end of each economic cycle. Libor rates and short-term interest rates rise, causing debt-service payments to increase at the end of

This article was written by

Eric Basmajian profile picture
Tracking Economic Inflection Points To Guide Your Asset Allocation Strategy

Eric Basmajian is an economic cycle analyst and the Founder of EPB Macro Research, an economics-based research firm focusing on inflection points in economic growth and the impact on asset prices.

Prior to EPB Macro Research, Eric worked on the buy-side of the financial sector as an analyst at Panorama Partners, a quantitative hedge fund specializing in equity derivatives. 

Eric holds a Bachelor’s degree in economics from New York University.

EPB Macro Research offers premium economic cycle research on Seeking Alpha. 

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Disclosure: I am/we are long SPY, TLT, IEF, SHV, GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Short JNK, EWI, XLV

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