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Libor Rising to the Occasion

Shifting dynamics in short-term funding markets have put the floating back in floating rate.

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This  article appears in the February 2017 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting the website.

The three-month London Interbank Offer Rate (Libor) surpassed 1 percentage point in early January 2017, a first since May 2009 for the widely referenced interest benchmark. The rate is derived by polling roughly 20 or so global banks on a daily basis for quotes of what they would charge other banks to borrow money for three months, dropping the outliers, and calculating an average. The result is used as a base rate for trillions of dollars in financial transactions and provides insight into liquidity and lending risk in the fixed-income markets. When Libor is higher, borrowing is more expensive, and when it is lower, funding is cheaper to access.

Emory Zink does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.