USD Libor would tighten further with a rate hike from Fed

London Interbank Offered Rate (Libor) based on the U.S. dollar has already leaped to the highest level since the 2008/09 crisis and currently hovering around 0.86 percent (3-month). Compared to that, 3-month Libor based on the pound is hovering at 0.38 percent and for Euro, it is around negative 0.3 percent. So, it is clear that there are some shortages, with regard to the USD. We have listed below some of the factors that could be contributing to the rise,

• Rate hike anticipation from the U.S. Federal Reserve
• Increased risks in the financial systems that have been fuelling the demand for dollar-based funding
• The increasing number of corporate defaults, those are now much higher than 100 and at the highest since 2009.
• The major regulation changes would kick in from October on how money market funds operate and it would result in an increased cost of funding for the corporates.

Many market participants and analysts have been saying that the market is doing the tightening on behalf of the Fed, however, we feel that if the Federal Reserve increases interest rate in September (this Wednesday), even then the spread between the Libor and the U.S. treasury unlikely to shrink. We expect the Libor to move above 1 percent.