Libor Fading, But Far From Forgotten, as Market Focuses on Fed

The three-month dollar rate, one of the few of the Libor suite to get a temporary reprieve and still be published until mid next year, has risen in 13 of the first 15 trading sessions of 2022 and is hovering at its highest levelsince August 2020.

That reflects the fact that traders are now pricing in the prospect of tighter policy by the Federal Reserve. It also means that even though the Fed has yet to actually implement its first quarter-point hike — which most currently expect in March — its hawkish shift is already taking effect for borrowers around the world.

Of course, that increase is also being played out in Libor’s heir presumptive, the Secured Overnight Financing Rate, and the differences in how the two have reacted to recent market shifts provides a glimpse at how the regime will change when Libor is fully abandoned once and for all in 2023.

The three-month Libor rate has jumped close to 5.8 basis points so far this year and currently stands at 0.26714%. The three-month SOFR benchmark, on the other hand, has risen around 7.6 basis points over the same period, based on CME data.

In the futures market, meanwhile, SOFR open interest has risen to a record 2.272 million contracts, more than 20% of eurodollars. In terms of volumes being traded on a daily basis, SOFR versus eurodollar activity has increased from up to 10% in October to north of 30% at the start of this year. Liquidity in the SOFR swaps market is also seeing a rapid increase, currently showing around 45% of CME Group’s USD swap trades up from 35% in December and just 7% back in July.