Category: Interest Rates

Finding (a new) LIBOR


Since the LIBOR scandal erupted, US officials have been working toward an alternative benchmark.  In 2014, the Fed set up a working committee that includes more than a dozen large banks and regulators.  Before the weekend, the committee (Alternative Reference Rates Committee) proposed two possible replacements for LIBOR. 

There reportedly was some consideration of using the Fed funds as an alternative.  However, Fed funds were rejected because it would have made it more difficult to change the monetary policy framework in the future. 

Interest Rate Update: Mortgages, Junk Bonds Reach Lows


Interest rates for home loans, junk bonds, and several other financial products have fallen while the Federal Reserve hints at expanding the monetary base further.  Even as several economic indicators show a slight resurgence, mortgages declined alongside Treasuries due, in part, to a slump in home buying.

Interesting Interest Rate Differentials


During this holiday period, participation is light and order-driven activity can push prices more than usual.  Investors should not let the noise and gyrations obscure the bigger picture.  We continue to place the divergence of monetary policy at the center of our narrative.  Barring a significant negative surprise from the labor market, we expect the Fed to hike rates again, with March as the most likely timeframe.

Interest Rates Rise and Stock Prices Fall Because…Present Value


A top-level committee of the Federal Reserve, the US’ central bank, is meeting this week to discuss when it should begin raising interest rates.

Often when a central bank lifts rates, the country’s stock market falls. When the central bank cuts them, share prices go up. Typically, this occurs well in advance of the actual change because investors are making bets on what they think will happen. In addition, sometimes this seems counterintuitive, because a central bank usually raises rates when an economy is strengthening and lowers them when it is weaker.

Implied Yields and the New Fed Funds Interest Rate Range


A key shift at the Federal Reserve that many in the market have not grasped is that the Fed funds target is a range now not as fixed point as in the past. Yet many continue to calculate fair value for the Fed funds futures contract the same way they did previously.  

The current target is 0-25 bp.  The effective average, which is what the Fed funds futures contract is linked, has been averaging around 12 bp, near the middle of its range. The effective average is weighted by volume.  

Looking beyond rate rises as 2015 looms


Despite a point in mid-week when it looked like the dollar might finally be in for a real correction, the dichotomy of economic performance between the US and most of the rest of the world appears to be growing once again.

The notes from the Federal Markets Open Committee on Wednesday caused a real retracement in the dollar across several currencies, the like of which has not been seen in several months. Over the course of an hour, the pound gained 128 pips against the dollar; AUD gained 91 and the yen 52. The euro managed to gain 89 pips in just over 30 minutes.

Interest Rate Cut


An interest rate cut is used by policymakers to regulate the amount of money available in an economy. The central bank of a country (such as the Federal Reserve Bank for the US and the ECB for the Eurozone) has the statutory power to regulate interestrates. Depending on the prevailing economic conditions and future estimates, interest rates can be increased or decreased by the country’s central bank. It also has the power to purchase or sell government-backed securities to control interest rates. An interest rate cut helps to stimulate growth and fight inflation.

Historical Interest Rates


Historical interest rates, both high and low, have been the result of weak economic policies over the years. The lack of political motivation and sensitive consumer behavior have also contributed towards volatility in interest rate.