US: Continued relentless increase in dollar LIBOR - BBH

Analysts at BBH note that there is a continued relentless increase in dollar LIBOR as it appears to have fallen in only five sessions here in Q1 18 and ICE three-month LIBOR has not fallen in over a month.  

Key Quotes

“Some argue that with US T-bill sales set to slow after the recent deluge, that some pressure may be relieved.  Alternatively, if the pressure is also emanating from tax laws that encourage US companies to repatriate (bringing mostly offshore dollars onshore) and the disincentives from lending between parent and subs (for both domestic and foreign-based companies) then the pressure may persist.”

“At the same time, the dislocation is seeing dramatic but opposite adjustment in the cross-currency basis swaps market.  On three-month tenors the premium for dollars against the yen, which reached more than 100 bp on top of LIBOR at the end of 2017, briefly traded at a discount yesterday for the first time since early 2012.  It is back to a premium today (~16 bp+ LIBOR).  Cross-currency basis swaps for dollars against sterling reached 80 bp on top of LIBOR in the middle of last December.  The premium for dollars switched to a discount last week and that discount is now near 17 bp.  A discount for dollars has barely existed since 2008.  The premium for dollars over euros approached zero yesterday for the first time in nearly four years and now is a little more than six basis points on top of LIBOR.”

“This conflicting forces, higher USD LIBOR, and lower dollar premium or even a discount in the cross-currency swaps market has far-reaching implications even if the causes may not be fully understood.  It raises the cost of hedging, which means it reduces the attractiveness of buying US fixed income--Treasuries as well as corporate bonds--, though this week's US have gone relatively smoothly.   The auctions continue today with $15 bln two-year floater and $29 bln seven-year notes.”