LIBOR moving in the right direction: 5.72% - 04.11.2008

Author: David Whittaker Posted on: 04 November 2008

Since the pre-emptive 0.5% cut in Base Rate in early October 3 month LIBOR has been reducing steadily at 2 or 3 bp per day.. At that time LIBOR was at a premium of 1.75% to Base Rate which was an untenable position.  With 3 month LIBOR set today at 5.72% and 2 days to go before the next MPC announcement, there is a slight chance that the premium were a 0.5% cut be made to be around about 1.6% which is a slight improvement given that interbank liquidity is still uncertain.

If, however,  Base Rate is cut by 1% then LIBOR will be at a very uncomfortable premium of 2.1% which would force lenders to re-price any products linked to Base Rate.

The last fortnight has seen two bond issues under the Bank of England guarantee programme - £3Bn for Barclays and £2Bn for HBOS at an average price (including default credit SWAP & G'tee fee) of  1.68% - not pretty but there was a suggestion of stronger investor interest by the time HBOS came to market with the second deal.........all necessary steps towards a functioning market !!

 Once the market starts to price more issues at better premiums then lenders will have the confidence to issue new mortgage products that reflect these improvements. SWAP rates continue to ease with 3 year SWAP at 4.4% but stil a long way to go to reflect what many will see as the likely Base Rate of 2.5% for much of next year.