Tuesday, June 14, 2011


Maybe things don't work the way I think they do. Can anyone on earth tell me why the LIBOR keeps falling week after week.

I'd think with Greece defaulting, banks wouldn't be so calm about lending to each other.


  1. LIBOR is just an overnight lending rate, so it wouldn't reflect the risk of a run on the bank. The fact that it's moving lower would suggest that the market thinks interest rates will stay low for awhile.

  2. Thanks.

    Follow on question - They only get nervous about lending to each other when interest rates are rising?

    I guess rates have little option than to stay low. I guess for the moment, it's the lesser of all evils.

  3. It's not so much about nervousness, but rather expectations. In 2007, Libor was at 5%+ for most of the year because people needed that much to keep them from being tempted to put it into stocks or real estate. They also wanted a premium because they figured the fed would increase rates to slow down inflation. Today we are under 1/4 of a percent because people think that the economy is getting worse and that the Fed would be crazy to raise rates. The only time a "nervousness" premium really appeared was after Lehman collapsed and Libor spiked 80 basis points on the fear of a bank run. Even then though the yield was less than 4% because people simply don't worry as much about money that settles the next day vs. longer term stocks/bonds/dirivatives.