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LIBOR and a bond update!
Apr 17, 2008 - One of our veteran traders lends his perspective on the LIBOR and what it means to today's market conditions.
More trading
perspective from SOLO…
Many years ago my
Trading Room was a Reference Bank for LIBOR in Middle Eastern Currencies.
I thought the following perspective might help Traders understand what is
happening.
Background.
LIBOR stands for
London Inter Bank Offered Rate and is set at 11 am GMT each day by the
British Bankers Association.
Libor is the rate at
which the reference banks will lend to each other for various time
periods EG 1month, 3 months, 6months etc. Credit markets and Derivative
markets use these rates as their reference points in pricing.
The BBA takes the
rates quoted by the reference banks (these vary from currency to
currency) and arrive at the AVERAGE for each period for each currency.
Bank of America
The problem now is
that where as Bank of America may be quite willing to lend to JP Morgan
Chase say 3 Month $ at say 3 1/2% they would not be prepared to lend at
the same rate (if at all in this climate) to The Third National Bank of
No Where.
So What? - well if
our 3rd National Bank has to pay a premium for its Deposits its margins
on Syndicated Loans and Derivative Hedges have either shrunk or gone
altogether.
This is not uncommon
in times of tight Credit - i.e. the BBA had the same problem in the late
1970's and solved it by expanding the list of reference banks ( I think
originally there were just 5 banks). But to go beyond 16 in
In thin market
conditions I got round the situation by actually doing a small (
comparative to the market size norm) trade at my quoted price through a
broker with another reference bank. That way everything was documented
and supported by actual transactions.
If reference banks
get together and decide what the rate should be, that can lead to
accusations of price fixing.
If anything untoward
is happening the effect on pricing is unlikely to be more than 1/4% PA
and probably nearer an 1/8% - in my opinion !
Now let’s have
a look at the Bonds since my last post regarding the short opportunity
available there…
Regards
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