Negative LIBOR Strategy

Chatham Financial White Papers – May 2016


Negative USD LIBOR!?: A Brief Background
It was hard not to imagine Sisyphus’ allegorical rock rolling back down the hill when the topic of negative interest rates in the U.S. went viral in February. This, only a few short weeks after the Fed carefully raised their target range for the policy rate following years at the zero lower bound and simultaneously guided the markets to expect a smooth ride to a cruising altitude of 3% for the funds rate. Those of us who had forecast (or hoped) for the frequency of our use of the terms “inevitable, unprecedented, and unconventional” to decline to their pre-crisis levels were disappointed by a more volatile reality, yet again. But as we lay out the relatively rapid rise, and subsequent rationalization, of the market’s perception of the likelihood for a negative USD LIBOR setting, it seems to this observer that some of the more enduring risk management lessons will stem from our understanding of the market’s reaction to the possibility.

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