“Prediction is very difficult, especially if it’s about the future”
-Neils Bohr
The interest rates that banks pay for short term loans increased for the first time in three days as investors become increasingly skittish about the debt situation in Europe. The London Inter Bank Overnight Rate (LIBOR) is the interest rate that banks charge one another for three-month dollar loans. It rose to .5375, which is only a marginal increase but a resumption of a trend of increases.
LIBOR has increased by more than 100 percent this year, largely due to the debt crisis in Europe. While the European Central Bank (ECB) has approved a massive bailout package aimed at helping insolvent European countries*, confidence in European banks is diminishing on a trifecta of bad news. Yesterday the ECB warned that Euro banks could incur up to $240 billion in additional losses over the next year and a half. On Friday the ratings firm Fitch downgraded Spain’s credit rating. Earlier in the week the Spanish government seized CajaSur, a major Spanish bank, to prevent insolvency.
*Make no mistake about it, the bailout is really aimed at protecting the creditors of indebted European nations, mostly multinational French and German banks who stand to lose extraordinary amounts of money on sovereign default. To see a great graphic demonstration of this, check out this great New York Times chart.
LIBOR is important to those watching mortgage rates because it is the benchmark for more than $350 trillion worth of interest-bearing financial instruments, ranging from mortgage rates to credit cards. When LIBOR goes up, so do some mortgage rates.
It is worth noting that LIBOR is still very low by historical standards, and there is a possibility that it is increasing in anticipation of the higher interest rates that come along with an economic recovery.
Another sign that indicates that investors are wary of banks’ creditworthiness is the widening TED Spread, which is the difference between the yield on the three-month U.S. Treasury bill (which is considered risk free) and LIBOR. When the spread widens it is an indicator that investors perceive increasing risk in lending to banks.
There is considerable volatility across all markets right now, and it seems as though investor sentiment changes with the wind. There are a multitude of factors influencing markets right now: conflict on the Korean Peninsula, instability in Gaza, the European debt contagion, and a slower than expected recovery in the United States, among other things.
Do you think mortgage rates will increase in the near future? Let us know in the comments section below.
Reports this morning from the Institute for Supply Management (ISM) found that U.S. Manufacturing expanded for the 10th-consecutive month in April. The ISM’s manufacturing index decreased slightly to 59.7 in April, from 60.4 in March. This reading was slightly ahead of economists’ expectations. Any number over 50 indicates that the manufacturing sector is growing.
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