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March 23, 2018 at 04:59 PM
The surge in U.S. dollar Libor rates has trickled into funding markets globally. American investors may not have to look further than their domestic corporate-bond market to see more pain.
The three-month London interbank offered rate rose to 2.29% Thursday, the highest since the financial crisis. Borrowing costs for U.S. investment-grade corporate bonds have skyrocketed to 3.86% as of Wednesday, the highest since 2011.
(Related: Less Is More in World of Corporate Bond Trading, Report Says)
In response, investors are hedging their bets and seeking out protection through credit-default swaps, which are now at levels not seen in almost a year.
Though technical in nature, the widening reflects an increasing scarcity for U.S. dollar funding and has more room to go, Citigroup Inc. strategists Matt King and Steve Kang wrote in a report this week. Even though the move doesn’t convey fundamental stress in the system, there’s still the possibility that widening spreads could exacerbate short-term funding needs even further, said Travis King, head of investment-grade credit at Voya Investment Management.
