Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Most benchmark yields have plunged to record lows this year. But there's one important exception: the dollar London Interbank Offered Rate, or Libor, which has shot up to the highest level since 2009.

Rate Spike
Libor, a benchmark rate for trillion dollars of debt, has surged this year
Source: ICE Benchmark Administration

This matters because as much as $6.9 trillion of debt is pegged to this rate, including some mortgages, student loans and corporate loans, according to Goldman Sachs analyst estimates in an report dated Monday. Floating-rate debt that's pegged to Libor requires borrowers to pay more as the rate rises. So the 0.2 percentage point increase in three-month Libor since the beginning of this year theoretically translates to an extra $14.2 billion of interest expense by all the borrowers with loans pegged to this rate.

Low Expectations
Futures traders are pricing in a less than 50 percent chance that the Fed will raise rates this year
Source: Bloomberg

This is an especially odd occurrence because 10-year U.S. Treasury yields have fallen this year as sovereign bond rates around the world plunge to new lows. While the Federal Reserve is thinking about raising overnight rates again, it doesn't seem particularly eager to do so.

Trending Lower
U.S. Treasury yields have generally fallen this year as central banks globally add stimulus
Source: Bloomberg

Why is Libor rising as most other benchmarks fall? One reason is that new regulations go into effect later this year that have made money-market funds less desirable for some investors, thus reducing the demand for short-term investments that provide dollar funding to banks. Some analysts have breathed a sigh of relief at that explanation because it means that the increase hasn't stemmed from stresses in the financial system. 

Others point to different reasons, including the introduction of negative interest rate policies in Europe, which supercharged the global hunger for dollars. The more people wanted to hold on to dollars, the more expensive it became to get them. 

Goldman analysts noted that even with higher Libor rates, credit conditions have eased for many more people given lower Treasury and other sovereign yields. Still, there are costs. It's getting more expensive for many people to borrow regardless of their credit scores, even if the Fed never raises rates again.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net