Photographer: Chris Ratcliffe

Libor's Climb to Almost Decade High Shouldn't Be Overlooked

The rise in the benchmark borrowing rate for trillions in U.S. financial products to the highest level since the global financial crisis shouldn’t be ignored amid the optimism over pending cuts in corporate taxes.

The London interbank offered rate, or Libor, pushed through 1.5 percent this week, the most since December 2008. That was just a few months after Lehman Brother Holdings Inc. went bankrupt and triggered a near global credit freeze.

“Please don’t estimate the impact of a lower corporate tax rate and assume all else equal,” Peter Boockvar, chief market analyst at Lindsey Group, wrote in a note Wednesday. “A 1.5 percent Libor rate is obviously very low, but the rise in rates is happening on a historically large pool of debt.”

About $350 trillion of global financial products and loans are linked to Libor, with a fair share of that tied to the dollar-based benchmark. That means the move higher in Libor amid the Federal Reserve’s gradual tightening will be a headwind even as any tax cuts could prove a tailwind to the economy, Boockvar said.

Even though the world was put on notice this year that the scandal-plagued Libor was on its way out, with regulators already working on alternatives, for now it’s still the key link to many float-rate instruments. And it’s expected to stay that way for a while.

“Maybe the first sign of the impact of this persistent rise in short-term interest rates was seen in the weekly mortgage applications,” wrote Boockvar, referencing MBA mortgage applications that rose 4.7 percent for the week ended Dec. 1 and that adjustable-rate mortgages as a percentage declined. That’s often viewed as a sign that home buyers are seeking to lock in loans before borrowing rates climb higher.

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