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LIBOR Was Expected To Drop. It Dropped. What Might This Mean?

Jeffrey Snider profile picture
Jeffrey Snider


  • LIBOR used to be the most boring interest rate in the world, but when it was that, it was also the most important.
  • When LIBOR dropped sharply on Thursday, that is supposedly highly irregular and unexpected, except that it was expected by everyone.
  • In fact, the eurodollar futures market has said for weeks, months since inversion that balance of probabilities 3-month LIBOR was going to start to decline.
  • Rate cuts, official rate cuts, may be closer than you think.

Everyone hates LIBOR, until it does something interesting. It used to be the most boring interest rate in the world. When it was that, it was also the most important. Though it followed along federal funds, this was only because of the arb between onshore (NYC) and offshore (mainly London, sometimes Caymans) conducted by banks between themselves and their subs (whichever was located where). Unsecured markets used to be central.

Today, LIBOR dropped sharply. People are talking about it. A few have thoughts. This is supposedly highly irregular and unexpected, except that it was expected by everyone. Everyone who trades in eurodollar futures and (honestly) observes that market's movements.

Here's what I wrote on December 28:

The current front month is January 2019, and its quoted price as I write this is 97.2475. The EDH (March) 2019 contract trades at 97.29 currently and it will drop off the board on March 18.

Three-month LIBOR was fixed yesterday at a fraction higher than 2.80%, meaning that if it stays around or above that level someone is losing money on it. The futures price isn't directly translatable but back-of-the-envelope it works out to an expectation for 3-month LIBOR on that date in March to be less than what it is fixed now.

In other words, the market is seriously betting LIBOR is coming down not two years from now but in the short run. That expectation only grows the further out in time (down the curve).

The eurodollar futures market has said for weeks, months since inversion that balance of probabilities 3-month LIBOR was going to start to decline. It has started to decline.

When all this rough stuff began at the beginning of December, around December 4, the February 2019 contract, the current front month with January's maturity obviously now off the board, was priced at 97.165; ~2.83% for

This article was written by

Jeffrey Snider profile picture
As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra’s client base. Jeff joined Atlantic Capital Management, Inc., in Buffalo, NY, as an intern while completing studies at Canisius College. After graduating in 1996 with a Bachelor’s degree in Finance, Jeff took over the operations of that firm while adding to the portfolio management and stock research process. In 2000, Jeff moved to West Palm Beach to join Tom Nolan with Atlantic Capital Management of Florida, Inc. During the early part of the 2000′s he began to develop the research capability that ACM is known for. As part of the portfolio management team, Jeff was an integral part in growing ACM and building the comprehensive research/management services, and then turning that investment research into outstanding investment performance. As part of that research effort, Jeff authored and published numerous in-depth investment reports that ran contrary to established opinion. In the nearly year and a half run-up to the panic in 2008, Jeff analyzed and reported on the deteriorating state of the economy and markets. In early 2009, while conventional wisdom focused on near-perpetual gloom, his next series of reports provided insight into the formative ending process of the economic contraction and a comprehensive review of factors that were leading to the market’s resurrection. In 2012, after the merger between ACM and Alhambra Investment Partners, Jeff came on board Alhambra as Head of Global Investment Research. Currently, Jeff is published nationally at RealClearMarkets, ZeroHedge, Minyanville and Yahoo!Finance. Jeff holds a FINRA Series 65 Investment Advisor License.

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Comments (9)

"...there will never be another 2008..."

I don't understand in what sense 2008. won't repeat. China's credit bubble in 2019. is larger than the US 2008. credit bubble.
I imagine the author meant every depression or severe recession is a unique entity with financial dominoes falling in a unique pattern. So while history never truly repeats, it does often rhyme!
AUDvantages profile picture
Suspect liquidations and risk reduction as well as coordinated volume by banks pulling LIBOR back from highs.
Salmo trutta profile picture
Top 10 Cities With the Largest Rent Increases – 2018 Edition


"Despite an improving economy and low unemployment rates, rent increases continue to chip away at earnings. And when residents are forced to devote ever-increasing portions of their paychecks to rent, the scenario not only impacts their ability to pad their savings accounts but also lowers their demand for other goods, hurting the city’s economy by extension."

The quack-pot economists have learned their catechisms (that there is no difference between money and liquid assets).

See: Shadowstats: "Alternate Inflation Charts"

Salmo trutta profile picture
Re: "Dr. Larry Summers for his secular stagnation theory in 2016"

It is no happenstance. All of this was cogently predicted in “Should Commercial banks accept savings deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43. And these were the “smartest guys in the room”.

Princeton Professor Dr. Lester V. Chandler, Ph.D., Economics Yale, theoretical explanation was in 1961:

“that monetary policy has as an objective a certain level of spending for gDp, and that a growth in time (savings) deposits involves a decrease in the demand for money balances, and that this shift will be reflected in an offsetting increase in the velocity of demand deposits, DDs.”

His conjecture was correct up until 1981 – up until the saturation of financial innovation for commercial bank deposit accounts I.e., the saturation of DD Vt according to Dr. Marshall D. Ketchum, Ph.D. Chicago, Economics

"It seems to be quite obvious that over time the “demand for money” cannot continue to shift to the left as people buildup their savings deposits; if it did, the time would come when there would be no demand for money at all”

Thus, as Dr. Leland J. Pritchard, Ph.D. Chicago - Economics, M.S Statistics, Syracuse predicted after the passage of (1) the DIDMCA of March 31st 1980, i.e., coinciding with his prediction of the (2) "time bomb", the widespread introduction of ATS, NOW, and MMDA accounts, that money velocity had reached a permanently high plateau.

Professor emeritus Pritchard never minced his words, and in May 1980 pontificated that:

“The Depository Institutions Monetary Control Act will have a pronounced effect in reducing money velocity”.

1963: "The growth of time deposits (within the payment's system) shrinks aggregate demand and therefore produces adverse effects on gDp."

Contrary forces are at work. Savings are not synonymous with the money supply.
johnnygbx profile picture
While the results remain depressing, I'm very much enjoying being tutored here on these indications and what they mean for the economy. I mean, when I'm driving down the road it sure is nice to know that there is an indication for fuel level, engine temp, etc.
turboelec profile picture
So right now, at this very moment the US and other markets are careening into a recession while the markets are blissfully unaware that the Fed and its central bank counterparts have lost control. I am aware that they were really never in control, but the self delusion seemed real enough.

A rate cut on the other hand would be tantamount to admitting a policy failure.

Even the greatest spin doctors would have a few problems with that sort of damage control. I would speculate that any such admittance of failure would be delayed. So we might witness how much pain the Federal reserve can stand before it throws in the towel. Powell and the Federal reserve have already been lampooned by many as 'cavers'. They might decide to dig their feet in at the wrong time. This is my favored scenario.

Either way this could get quite ugly even if bad news has become good news again.

take care
Is it any wonder that San Francisco Fed chair threw up a trial balloon with report that big time NIRP would have led to a much more successful recovery from 2008? I don't believe in coincidence, I think the Fed is in fact aware of what is coming but knows they have a *LOT* of PR work to do to get the public to swallow what they intend to feed them.
Francesca Marelli profile picture

Excess reserves are remunerated at -0.4%. Buying Bund at 0.10% can still make sense.
Logic in an absurd monetary new world.
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