- After more than 6 years anchored at very low levels, three-month LIBOR, or the London Interbank Offered Rate, quietly breached the 1% mark in early January 2017. Since then, LIBOR has continued to rise along with short-term U.S. Treasury rates.1 For example, the 2-year U.S. Treasury note has risen nearly 20 basis points year to date, while LIBOR reached approximately 1.3% this week.1
- LIBOR is one of the most widely used benchmarks for short-term interest rates and reflects the average estimated rate at which banks borrow from one another to fund short-term cash needs.
- LIBOR’s persistent climb in 2017 is important because it’s tied to trillions of dollars of consumer and commercial loans, including the senior secured loan market.
- Virtually the entire senior secured loan market features LIBOR floors, which set a minimum rate of yield should LIBOR drop below a stated level, of 1% or lower.2 With LIBOR’s protracted appreciation, the coupons of potentially billions of dollars of senior secured loans should begin, or continue, to reset at higher rates in the coming months.
1 U.S. Department of Commerce, http://bit.ly/Y4FaTF.
2 J.P. Morgan High Yield and Leveraged Loan Morning Intelligence, December 1, 2016.
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