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CIP Quips

LIBOR, It's Leaving

Did You Know…

That LIBOR, the benchmark that underpins over $350 trillion in securities, is scheduled to end in 2021? The Financial Conduct Authority (FCA) which has served as the regulatory agency responsible for overseeing LIBOR, has been on a quest to ensure that contributing banks do not leave prior to 2021 before transitions to new benchmarks have been solidified. 

Most corporate bond terms state that if LIBOR is no longer available and the calculation agent can’t get submissions from banks, then LIBOR will become fixed at the most recently reported value. This would cause floating rate securities to have fixed rate exposure, potentially exposing investors to significantly lower coupons over the life of the security.  Many argue that while the phase out of LIBOR is still years away investors are accepting market risk by buying LIBOR-based floaters with maturities extending beyond 2021.  They suggest that investors be compensated for that risk with additional spread or contractual protections and spread curves should steepen for floating rate exposure maturing beyond 2021 to reflect this. 



Our Thoughts:

Are you positioned to monitor the fixed income landscape? There are a lot of moving parts like, market fluctuation, economic and legislative changes not to mention the various structures of bond offerings and the different ways to analyze those.  We believe active bond management is prudent. As active managers, we position our income portfolio to take advantage of rising rates by actively monitoring credit valuations, interest rates and yield spreads. We believe good credit and covenant analysis can yield relative value in this current environment.


Source: Barclays, US Credit Research Libor Worries Afloat, August 2017



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Past performance is not a guarantee of future results. Indices are unmanaged and cannot accommodate direct investment. Themes assigned as per Roosevelt Investments’ evaluation. Risk tools may include cash or other securities that we believe possess a low or inverse correlation to the overall market.


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