It may not seem like much but there has been a strong march higher in LIBOR as debt markets prepare for Fed normalization. The markets are clearly preparing for higher short rates even if longer maturity debt is more mixed in its movement. Although this increase is small in absolute terms, it is significant relative to where we have been over the last few years. The forward curve is showing even greater upward movements.
We have argued that the Fed is biased for delay, but it worth realizing what happens when this LIBOR trends starts to dominate short rates. Eurodollar futures trading will see significant increases, swap activity will increase, hedging will start to be considered, option vol will increase, option trading strategies using out of the money strikes will see large increases, and short maturity investing will pick up. Regardless of rate movement, trading activity will be on a significant rise to levels not seen in years.
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