Explanation for intra-monthly variation in LIBOR - UKIR

WeatherMan

Hi Folks,

Given the recent upsurge in the rates for fixed-rate bonds i've been having a little look around at the reasons why. It seems that the financial institutions are looking for ways of gaining cash now the inter-bank lending rates are rocketing. Getting it from investors seems sensible, and competititve rates will attract investment money.

I've been looking at how the 1-day LIBOR rate has been varying with comparison to the UKIR (The BoE tries to keep LIBOR overnight pretty similar to UKIR) and see that there has been a flush of activity recently. All pretty self-expalantory; we can even see the effect of the BoE decision to increase it's reserves with the overnight fall in 1-day LIBOR (banks can now get a guaranteed rate on more money).

My question is a more general one. If you plot the data e.g.

http://213.225.136.206/mfsd/iadb/index.asp?Travel=NIxIRx&levels=1&G0Xtop.x=30&G0Xtop.y=4&C=13T&C=5JK&FullPage=&FullPageHistory=&Nodes=X3952X3955X3958X3961X3965X3969X3972X3975X3978X3981X3985X3989X3992X3995X3998X4001X4004X4007X4010X4013X4016X4019X41107X41122X3687X3694X3695X3688&SectionRequired=I&HideNums=-1&ExtraInfo=true#BM

and then plot the difference between LIBOR and UKIR against time (say for 2007), we see a monthly sinusoidal pattern with the LIBOR equaling the UKIR at roughly the centre of the months. Bearing in mind i'm no economist, what is causing this underlying pattern? Occurs after monthly rate decision and seems consistent.

Thanks for any help folks,
WM

baby_boomer

The recent surge is due to banks not being sure if other banks they are lending to are exposed to problems in the US mortgage market.

US mortgage have been securitised and sold around the world as financial instruments.

No-one knows which banks are exposed, or to what extent.

And financial markets hate risk.

So Libor will remain high until the risks can be quantified.

I assume we are talking months rather than years. Perhaps this explains the hike in 1 Year Bonds, while 3 year fixed rate bond rates have fallen.

The higher Libor rates will also act as a dampener on the economy, possibly helping to control inflation without further BofE rate hikes - perhaps accounting for the slackening off in medium term interest rates.

WeatherMan

Thanks for that.

I understand the recent raise and the reasons for it etc... However I am more interested in the smaller timescale monthly up and down pattern seen in the statistics each month. Any ideas?

WM

purch

LIBOR ( London Interbank Offered Rate ) is a rate set by a panel of Banks

It does not always necessarrily correspond to the actual market rate, exactly

LIBOR's for fixed periods i.e. 1 Month, 3 Month, 6 Month etc are set around midday.

The LIBOR rate is used for transactions which have been previously agreed to be set at LIBOR plus or minus an agreed margin.

I didn't realise that an official LIBOR was set for Overnight money..but if it is then it will be set, based on the market that morning rather than the market in the afternoon when the Clearers and other large Banks are balancing their books.

I worked on the trading floor for over 15 years and have seen overnight money as low as 0.25 % and as high as 50 %

A lot of this latest fuss over Barclays having to go to the Bank for last ditch funds is rubbish, and written by people with no idea how the markets work.

WeatherMan

Thanks,


I was refering to the daily overnight SONIA IUDSOIA rates. It appears that there is generally an oscillation in the difference between it and the base rate. This is smallest around the 11-15th of the month. I wonder what the cause of this is?

WM