Libor scandal: Risk spread unaffected

Interest rates, data, question mark Interest rates, data, question mark

A number to references on Google recently relate to the ongoing news and investigation of Barclays and other banks' manipulation of LIBOR, essentially leading to lower LIBOR and eurodollar rates. Indeed, a number of lawsuits filed against banks are seeing light of day.

You would think that this scandal involving some ot the larger banks that control short-term rates would have an impact on eurodollar risk perceived by the market. However, on July 10 there is apparantly little or no indication of increased risk. A chart attached here shows that eurodollar yields across maturities going out to ten years are close to the U.S. Treasury yields. For example, at the 5-year maturity the spread is only about one-third of one percent, from 0.62% to 0.93%. If risk is not playing a part in causing the eurodollar-Treasury yield spread, the difference may be entirely attributed to the effect of convexity adjustment.

The 31 basis point difference on July 10, 2012, may be compared with spreads of 57 basis points on May 14, 2009, 48 basis points on June 30, 2010, and 39 basis points on April 14, 2011. Although the original effect of rate manipulation may have pushed the eurodollar yield lower, risk has not caused it to go higher.


yields, rates, libor, eurodollar

comments powered by Disqus
Check out Futures Magazine - Polls on LockerDome on LockerDome