Where are Worldwide Rates heading ? - LIBORS

inspector_monkfish

lemonjelly wrote: »

:eek:
I'm slightly scared, because I think I understand princofpounds' post.

Not sure what scares me more - the fact I (think I) understand it, or the consequences of what the post contains!:eek:

he is talking about interest rate curves

when you have such a low base rate, the curve is always going to have an upward trend when you look 12mths ahead, that doesn't always mean it is going to follow that curve to a tee.

purch

With the current steepness of the GBP Yield Curve, it is to be expected that the 12 month LIBOR should increase, in fact IMHO the 12m LIBOR is still too low in comparison to the medium term curve.

The curve from Base to 12m can steepen further, but it is just providing certain institution with a licence to 'print money', and under normal circumstances cannot be allowed to continue indefinately (but these are far from normal circumstances, so what actually happens is open to huge debate)

inspector_monkfish

purch wrote: »

With the current steepness of the GBP Yield Curve, it is to be expected that the 12 month LIBOR should increase, in fact IMHO the 12m LIBOR is still too low in comparison to the medium term curve.

The curve from Base to 12m can steepen further, but it is just providing certain institution with a licence to 'print money', and under normal circumstances cannot be allowed to continue indefinately (but these are far from normal circumstances, so what actually happens is open to huge debate)

precisely mate
we can currently arbitrage Sterling 12mths around 30 basis points below libor

princeofpounds

as it says above, they are 12mth LIBOR rates.

booooo I read it too quick and improperly. sorry. much grovelling.

inspector_monkfish

princeofpounds wrote: »

booooo I read it too quick and improperly. sorry. much grovelling.

no worries
if you want to know overnight libor rates, i can tell you they are extremely low, low, low, low....!!!

lemonjelly

purch wrote: »

With the current steepness of the GBP Yield Curve, it is to be expected that the 12 month LIBOR should increase, in fact IMHO the 12m LIBOR is still too low in comparison to the medium term curve.

The curve from Base to 12m can steepen further, but it is just providing certain institution with a licence to 'print money', and under normal circumstances cannot be allowed to continue indefinately (but these are far from normal circumstances, so what actually happens is open to huge debate)

inspector_monkfish wrote: »

precisely mate
we can currently arbitrage Sterling 12mths around 30 basis points below libor

inspector_monkfish wrote: »

no worries
if you want to overnight libor rates, i can tell you they are extremely low, low, low, low....!!!

Sorry, another question...

So if the BoE continue with the printing, then there is a risk of IR rises, & they'd be sooner rather than later?

However if they hold/stop printing, IR rises are likely to be slow & gradual?

Have I got this right, or completely the wrong end of the stick?

& what's arbitrage mean?

princeofpounds

So if the BoE continue with the printing, then there is a risk of IR rises, & they'd be sooner rather than later?

However if they hold/stop printing, IR rises are likely to be slow & gradual?

It depends on which interest rates you are talking about. The bank itself can control really short term interest rates as it wishes, this is one of a set of policy tools which allow it to control the money supply (which you can think of as printing money). Quantitative Easing is another one, and although it looks more like printing money it isn't quite as they are buying something in return for it (government debt). The easier the supply of money, the 'looser' we say monetary policy is.

The problem is that if monetary policy gets too loose then more and more money is chasing around the same amount of goods in the economy. In some ways, money is just a way of dividing up the rights to the economy. So instead of 100 pence chasing each tomato, it might be 103 pence one year later - that is inflation.

If inflation is expected to happen, then the market needs to price that in. If I lend you 100p to buy the tomato, and ask for 100p back at the end of the year, then I will lose money in real terms - the number of real tomatoes I can buy has gone down.

If I ask you for 103 back at the end of the year (3% interest) I will not lose money in real terms, but not make it either. There is not yet an incentive for me to lend you money, but this is a *minimum* required to beat inflation. I might charge you more on top of this the more risky I think you are.

So the market interest rate has to at least cover inflation.

So you are kind of right. If the BoE allow the money supply to stay more loose than expected, the market will start to expect more inflation, and interest rates will rise in the market. If the BoE tighten the money supply more than expected, the market will expect less inflation and future interest rates might be lower than the yield curve would suggest now. It could even fall from current levels, although that seems unlikely, and you could even get zero interest rates if you expect deflation to occur.

The speed of rate rises is more to do with the speed expectations of the future change. Remember that the market interest rate over 6 months might react differently to the 1 year or 5 year interest rates - they are all different, although the longer interest rates incorporate the expectations of the shorter interest rates but just add a bit more time on the end.

Arbitrage is just a word that means taking a riskless profit from mispricing across two different markets. If I know something sells for 101 in market A, and for 100 in market B, if I can simultaneously buy in B and sell in A then I can make an instant profit of 1 without being exposed to the risk of those prices moving.

lemonjelly

princeofpounds wrote: »

It depends on which interest rates you are talking about. The bank itself can control really short term interest rates as it wishes, this is one of a set of policy tools which allow it to control the money supply (which you can think of as printing money). Quantitative Easing is another one, and although it looks more like printing money it isn't quite as they are buying something in return for it (government debt). The easier the supply of money, the 'looser' we say monetary policy is.

The problem is that if monetary policy gets too loose then more and more money is chasing around the same amount of goods in the economy. In some ways, money is just a way of dividing up the rights to the economy. So instead of 100 pence chasing each tomato, it might be 103 pence one year later - that is inflation.

If inflation is expected to happen, then the market needs to price that in. If I lend you 100p to buy the tomato, and ask for 100p back at the end of the year, then I will lose money in real terms - the number of real tomatoes I can buy has gone down.

If I ask you for 103 back at the end of the year (3% interest) I will not lose money in real terms, but not make it either. There is not yet an incentive for me to lend you money, but this is a *minimum* required to beat inflation. I might charge you more on top of this the more risky I think you are.

So the market interest rate has to at least cover inflation.

So you are kind of right. If the BoE allow the money supply to stay more loose than expected, the market will start to expect more inflation, and interest rates will rise in the market. If the BoE tighten the money supply more than expected, the market will expect less inflation and future interest rates might be lower than the yield curve would suggest now. It could even fall from current levels, although that seems unlikely, and you could even get zero interest rates if you expect deflation to occur.

The speed of rate rises is more to do with the speed expectations of the future change. Remember that the market interest rate over 6 months might react differently to the 1 year or 5 year interest rates - they are all different, although the longer interest rates incorporate the expectations of the shorter interest rates but just add a bit more time on the end.

Arbitrage is just a word that means taking a riskless profit from mispricing across two different markets. If I know something sells for 101 in market A, and for 100 in market B, if I can simultaneously buy in B and sell in A then I can make an instant profit of 1 without being exposed to the risk of those prices moving.

:beer::beer::beer:
Yay! I got one right!


Thanks again for the response pop

princeofpounds

Oh, I should add that the bank can ignore market opinions of appropriate interest rates and keep giving out cheap money at non-commercial rates, but if it does so then you end up with a Zimbabwe situation where money becomes increasingly worthless.

To be honest, all the above isn't that clearly written but hopefuly you get the gist and one time I'll try to be a bit more structured about it all.

michaels

Suurely 12 month libor reflects interest rate expectations and liquidity preference - the increase in GBP 12m libor may reflect an expectation that UK rates are now more likely to increase in the next 12 months or/and an increase in the perceived risk of sterling triple-A rated assets - haven't GBP CDS spreads also widened?