While the rest of the bond market takes the Federal Reserve's latest interest-rate increase in stride, Libor is surging. And that still matters.

The steady march higher in the London Interbank Offered Rate shows the U.S. central bank's tightening cycle does have consequences, even as measures of overall financial conditions show they've eased as the Fed hiked rates this year. Libor serves as the basis for trillions of dollars in loans and floating-rate securities despite regulatory efforts to replace it following a price-fixing scandal.

"Libor represents a key benchmark proxy for short-term rates still to this day," said Jerome Schneider, head of the short-term and funding desk at Pacific Investment Management Co. (PIMCO). "Investors and market participants realize that the Fed is finally serious about normalizing monetary policy and their balance sheet and that short-term rates have to go up well above zero."

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