The unprecedented amount of cash the Federal Reserve has pumped into the financial system is proving more powerful for money-market rates than Chair Janet Yellen’s signals she will start turning off the spigot.
At a time when Treasury bond yields are climbing on speculation that Yellen will raise interest rates sooner than expected, the three-month London interbank offered rate is going the other way. The cost of three-month loans in dollars between banks, or Libor, fell to 0.22810 percent yesterday, setting a record low for the second straight day, according to the ICE Benchmark Administration in London.
While regulators have been looking into the potential manipulation of Libor, the rate is still important to the market given the amount of debt and contracts tied to it, according to Stanley Sun, a New York-based strategist at Nomura Holdings Inc., one of the Fed’s 22 primary dealers that bid at auctions. Libor has fallen by more than half from 0.58 percentage point in January 2012.