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« Musings | Main | An Important Welcome -- and Some Housekeeping »

April 24, 2008



Thanks, Marco.


Also important to understand the LIBOR OIS spread:

Turley Muller

It's interesting to see the divergence in LIBOR again, we saw that last year and then it pulled in for a bit, and since widened out.

Generally, the differential between 1yr LIBOR and 1yr CMT has been 50bps. Most hybrid ARMS use either of these indices. Mortgage desk I worked on, I offered both, up to the borrower which index he/she wants, the only difference comes in the margin. 225 for LIBOR and 275 for CMT.

1yr LIBOR now is 3.23 and CMT is 1.90, difference of 1.33, and 83bps above historical trend. Kinda sucks for borrowers that are facing a reset and they choose LIBOR instead on CMT, but who has that kind of foresight?

I don't know- but late 2006, Citi started paying up for LIBOR ARMS - 3/1 and 5/1. Not changing the margin, but offering a higher price, (lower initial rate) I couldn't really figure it out, my boss was curious too, as to why. I harvested all kinds of historlcal Data from my Bloomberg, ran regressions, couldn't find much variance. Typical spread 40-60bps. It appears that investors were betting on an impending dislocation down the road with LIBOR ARMS generating higher yield.

For years, I didn't think much about LIBOR vs CMT , but Jeff, when you raise the question about tying US securities to Euro Banks- for what purpose?

I think the lesson is always choose a CMT loan. CMT is the average yield on Treasuries with one year of maturity. The FED can affect this rate, it is "default free". LIBOR seems to be an animal of its own, hard to influence with policy and heavily based on credit risk of financial institutions, opposed to a central bank.

Check out my blog for a couple articles I written about this, if you haven't already. Thanks for the article, great info as always.


Maestro - The Fed Funds rate is usually for overnight lending and is the specific target of Fed policy. It is not a good indicator of interbank assessment of risks.

LIBOR has a lot of different maturities and is based on various currencies. There is really nothing like it in the US.

Thanks for the question, which is probably also on the minds of others.



"He wonders whether there is a need for an interbank rate based solely upon US banks."

Don't we have that already? Or is the Fed Funds rate different in a significant way that I don't realize?

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