Every day I expect this trend to reverse, or consolidate, especially since it is based upon interest rates for Libor. However, it just keeps going and going.
From Moneycafe.com:LIBOR stands for "London Inter-Bank Offered Rate." It is based on rates that contributor banks in London offer each other for inter-bank deposits. From a bank's perspective, deposits are simply funds that are loaned to them. So in effect, a LIBOR is a rate at which a fellow London bank can borrow money from other banks. Rate calculations are complex as they incorporate variables such as time, maturity and currency rates. There are hundreds of LIBOR rates reported each month in numerous currencies.
Apparently, since LIBOR is a rate that banks charge to lend to each other, it is reflective of confidence in the financial markets. The Eurodollar is a futures derivative that mimics LIBOR. It continues to fall as long as confidence between banks is improving. It is also extremely liquid, with more than 1,000,000 of open interest.
I have begun to wonder, with the Eurodollar approaching a value of 100, if that price is equivalent to a zero percent interest rate for LIBOR. From the CME's website:
"Quoted in IMM Three-Month LIBOR index points or 100 minus the rate on an annual basis over a 360 day year (e.g., a rate of 2.5% shall be quoted as 97.50). 1 basis point = .01 = $25."This suggests that with the Eurodollar priced today at 99.1300, the LIBOR rate would be .8700%, which is obviously less than 1%. Since the low rate is reflective of high confidence, it appears to represent the return of rising confidence in the financial markets, and particularly the lending between banks outside the United States. It closely mirrors both LIBOR and the Fed Funds rate, but is not set by the Fed.
