Libor for 12-Month Dollars Passes 1% as Traders Raise Bets on Fed Increase

The cost of borrowing dollars between banks for 12 months rose above 1 percent for the first time this year as speculation mounted that the Federal Reserve will tighten monetary policy in the coming year.

The London interbank offered rate, or Libor, for such loans climbed to 1.015 percent, the highest level since Dec. 8 and the first time it surpassed 1 percent since Dec. 16, British Bankers’ Association data showed today.

“The further along the curve we go, the closer we get to an eventual tightening of monetary policy.” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate and Investment Bank in London. “The market is beginning to price in the likelihood of higher interest rates. The move higher in 12- month Libor increases the probability the market will capture a rate move within that time period.”

Signs are emerging that the world’s largest economy is recovering from the deepest recession in seven decades, boosting speculation the Fed will increase interest rates. The U.S. economy expanded at annual rate of 5.6 percent in the fourth quarter of 2009, the best performance in six years, data from the Commerce Department on March 26 showed.

Futures on the CME Group Inc. exchange show a 39 percent chance the Fed will raise its target rate for overnight bank lending by a quarter-percentage point by December, up from 35 percent a month ago. The central bank, which ends a two-day policy meeting today, has kept the rate between zero and 0.25 percent since December 2008.

Recovery ‘Cycle’

U.S. policy makers lifted the discount rate, which is charged to banks for direct loans, to 0.75 percent from 0.5 percent on Feb. 18. The last time the Fed increased it was in June 2006.

The 12-month Libor is rising as there is “limited liquidity in term dollar interbank lending,” Green said. The increase is an indication of where we are in the “cycle of the economic recovery,” he said.

Three-month Libor, a benchmark rate for about $360 trillion of financial products worldwide, rose 1 basis point to 0.338 percent today. The Libor-OIS spread, a barometer of the reluctance of banks to lend that measures the difference between the three-month rate and the overnight indexed swap rate, climbed to 10.8 basis points, the highest since Jan. 20, from 10.0 basis points yesterday. Until today, it ranged between 5.8 basis points and 10.4 basis points in the past three months.

The three-month rate, which determines rates on everything from mortgages to student loans, surged as high as 4.82 percent in October 2008 after Lehman Brothers Holdings Inc. collapsed. The Libor-OIS spread ballooned to 364 basis points.

The BBA sets Libor each day by surveying banks on how much it would cost them to borrow from each other for 15 different periods, from overnight to one year.

To contact the reporter on this story: Keith Jenkins in London at kjenkins3@bloomberg.net

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