Saturday, August 14, 2010

LIBOR Rate Continues to Fall

Michael Dunton Sr. Vics President at Mt. McKinley Bank emails:

When these rates snap back upward, anybody with a variable or adjustable loan product is going to feel it's sting. Interest rate risk is at its highest when it is at these low levels. Additionally, the Fed will have to hold on to their MBS indefinitely if rates do rise and their paper decreases (plummets) in value. It's hold or take a blood bath on the sale.

London interbank offered rate, or Libor

 Latest                    Wk ago  

One month

0.27188                 0.29344

Three month

0.36938                 0.41125

Six month

0.59188                 0.63375

One year

0.96531                 1.00313
Given the amount of government funds that will need to be raised by the U.S. and most other countries, at somepoint this whole thing explodes. Continue to lock in rates. When the upside action in rates starts, it will be fast and furious. Low rates are the new bubble.


  1. IN a 2005 commentary, Robert Shiller observed:"The average real long-term government interest rate in 1891-1979 – a period ending just before Volcker oversaw soaring growth in borrowing costs – was a mere 1.25%."

    Currently 30-yr Treas. are about 3.9% and 10-yr Treas are about 2.8%. Depending on how you measure inflation, it appears real rates have room to decline before they even reach the average rate which existed for most of the 20th century. I realize there is concern about future inflation, but it is difficult to believe the market is completely blind to what you are seeing, ie. FED manipulation and government indebtedness.

  2. Bob - you seem pretty confident, but observed rates of change are not supporting your thesis - nor does the economic outlook. At some point, the pendulum will swing toward moderation within the Fed. We are already seeing cracks.

    Would I want to lock-in current nominal rates when the evidence is mounting for further disinflation and outright deflation? No. It's the real interest rate that matters.

    We chose to liquidate long-term debt.

  3. Inflation can come easily on the heels of deflation. Either way, people will get cut at the knees. Its just a question from which direction it will come.

    Yes, locking a 30-year 4.125% mortgage is a great deal and unprecented. So, too, could be the great crumbling that goes around you as the world falls to pieces while you enjoy your cheap mortgage.

    My putting forth the latest LIBOR scorecard was to illustrate, in my best Austrian fashion, that low rates in this case signal continued sickness and further deterioration of the economy. So long as Wall Street and Main Street rely on government action to fix the price of money and drive demand in the economy, no lasting recovery will be coming and further damage will result.

    I am confident that the Austrian views the economic world around us as still sinking, that there was never a recovery to begin with, it was a mirage created by stimulus spending--a lower LIBOR scorecard is one proof.