LIBOR or BoE base rate - which will go lower!
Discussion
I know this isnt what you want to hear, but people more intelligent than most of us have worked out/forecasted that those rates will bring the bank a roughly equal profit.
Aside from a genuine crystal ball, you might as well do 'ip dip dig s
t'.
Do either have early settlement clauses or set-up fees - this may be where the difference really lays.
Aside from a genuine crystal ball, you might as well do 'ip dip dig s
t'.Do either have early settlement clauses or set-up fees - this may be where the difference really lays.
Maxf said:
Hoppy2008 said:
Maxf said:
'ip dip dig st'.
Do you know, that's the first time I have EVER actually seen that written!t'.I like it, brings back good memories as a kid!
Thanks for taking me back though!! lol
I guess you are right.
No fees with either - but at the mo LIBOR / Base rate gap seems to be widening.
I expect BoE abse rate will fall further - but I know very very little about LIBOR and how it may or may not change.
I currently pay 2.25 over BoE base - and the bank are putting it up but giving me a choice of the two methods.
No fees with either - but at the mo LIBOR / Base rate gap seems to be widening.
I expect BoE abse rate will fall further - but I know very very little about LIBOR and how it may or may not change.
I currently pay 2.25 over BoE base - and the bank are putting it up but giving me a choice of the two methods.
My word, i'm currently locked and tracking at 0.34% above BoE base.
johnfm said:
I guess you are right.
No fees with either - but at the mo LIBOR / Base rate gap seems to be widening.
I expect BoE abse rate will fall further - but I know very very little about LIBOR and how it may or may not change.
I currently pay 2.25 over BoE base - and the bank are putting it up but giving me a choice of the two methods.
Is this secured lending? Are you tied to the bank? You might want to look around a bit. No fees with either - but at the mo LIBOR / Base rate gap seems to be widening.
I expect BoE abse rate will fall further - but I know very very little about LIBOR and how it may or may not change.
I currently pay 2.25 over BoE base - and the bank are putting it up but giving me a choice of the two methods.
I guess LIBOR has further to fall, and if confidence is restored in the banking system then it should fall so bank lending can continue.
3.05% over base rate still leaves you paying over 7% even if we see another 50bps drop, which we might do but I doubt any further. We could well see increases as they try and curb inflation (although I think inflation might be very much in the plan now).
In summary. fk knows. I'd maybe gamble on LIBOR, but it would be just that - a wild stab in the dark.
3.05% over base rate still leaves you paying over 7% even if we see another 50bps drop, which we might do but I doubt any further. We could well see increases as they try and curb inflation (although I think inflation might be very much in the plan now).
In summary. f
k knows. I'd maybe gamble on LIBOR, but it would be just that - a wild stab in the dark.Tricky one.
My personal view is that the Libor one is more likely to work out cheaper over the next 12 months BUT if you got for BOE, then you avoid getting caught up should Libor do something really stupid like BOE + 10%.
So I reckon, back of the scruffy envelope type calculations:
70% Libor works out better
20% BOE works out better
10% BOE works out A LOT better.
Please bear in mind I haven't traded in these markets for years, so I am far more clueless than those that are currently trading them
My personal view is that the Libor one is more likely to work out cheaper over the next 12 months BUT if you got for BOE, then you avoid getting caught up should Libor do something really stupid like BOE + 10%.
So I reckon, back of the scruffy envelope type calculations:
70% Libor works out better
20% BOE works out better
10% BOE works out A LOT better.
Please bear in mind I haven't traded in these markets for years, so I am far more clueless than those that are currently trading them
i) BoE + 0.8 (fixed) + 2.25
or
ii) BoE + 3MLIBOR spread (currently 1.6825) + 2.25
so with i) you're effectively fixing LIBOR spread at 0.8%, it's currently cheaper with no risk to LIBOR .. make your own mind up .. but that's a small premium to pay for not knowing how long it will take for LIBOR spread to return to its normal level.
or
ii) BoE + 3MLIBOR spread (currently 1.6825) + 2.25
so with i) you're effectively fixing LIBOR spread at 0.8%, it's currently cheaper with no risk to LIBOR .. make your own mind up .. but that's a small premium to pay for not knowing how long it will take for LIBOR spread to return to its normal level.
Edited by fido on Thursday 16th October 15:36
johnfm said:
It isn't residential borrowing - it is commercial, at pretty high LTV (now!!) - hence the rape from the bank.
Doesnt mean you can't move your lending around, assuming a better deal is out there, and the ffes dont make it a waste of time, and you're not tied to your existing lender.bluevelvet said:
Don't get caught in the libor trap!
With base you are in line with the economy, with Libor you are taking a view on the credit spreads of the banks improving.....
If the economy worsens,,,,bank credit spreads and libor will move out and reasonable chance central banks cut base further.
In a normal environment (distant memory) we have had 3m libor say 25 bp over base ticking along......then if the market is anticipating an aggressive rate cut of say 50bp.....in a couple of days,,,,the 3m libor would price the next 90 days at or below the current base rate (inverted curve)...as effectively it would be the sum of the next 90 days at the new lower rate, plus a little term premium....Not likely at the moment...spreads are way out at 160bp+
That said we are not in a normal environment, central banks have pumped billions going on to trillions into the money markets and as yet libors have not come into anything like spreads of normal times...
If we have more problems in the financial markets, such as a CDS implosion??? then certain banks will be in the frame, other banks will not be happy to fund libor rates and credit spreads go back out.
Obviously it depends on the term of your loan and the frequency of your fixings.....
BofE base is the safer option.
Libor option has far more implied volatility, if you think the worse is past and we are unlikely to have any further "events" in the market, then go with libor.
As a note, Libor is purely a reference rate fixed at 11am daily, to indicate where commmercial banks would be happy to lend money to each other.
Prior to last week when the BofE changed rates, base had been at 5% since April,,,Libor rates fix daily and are far more volatile taking into account good and bad news over the next 90 days (for 3mth fix)...right now With a 4.5% base, Libors could be anywhere between 4.85-7%+ ???? going forward.
If you want to follow 3mth libor rates,,have a look at the short sterling futures contract, these are fixed based on the 3mth libor rate at expiration.......futures price = 100-expected libor i.e 100-93.5 = expected 6.5 libor...so if you look at dec07,mar08,jun08 etc....it will show market expectations.
As stated base is more of a stable rate,,,libors fixed weekdays , so there are approx 250 a year,, you have more event risk on the fix,,,quite a few derivatives use the average fix over a period for this reason.
Good luck in your choice.
With base you are in line with the economy, with Libor you are taking a view on the credit spreads of the banks improving.....
If the economy worsens,,,,bank credit spreads and libor will move out and reasonable chance central banks cut base further.
In a normal environment (distant memory) we have had 3m libor say 25 bp over base ticking along......then if the market is anticipating an aggressive rate cut of say 50bp.....in a couple of days,,,,the 3m libor would price the next 90 days at or below the current base rate (inverted curve)...as effectively it would be the sum of the next 90 days at the new lower rate, plus a little term premium....Not likely at the moment...spreads are way out at 160bp+
That said we are not in a normal environment, central banks have pumped billions going on to trillions into the money markets and as yet libors have not come into anything like spreads of normal times...
If we have more problems in the financial markets, such as a CDS implosion??? then certain banks will be in the frame, other banks will not be happy to fund libor rates and credit spreads go back out.
Obviously it depends on the term of your loan and the frequency of your fixings.....
BofE base is the safer option.
Libor option has far more implied volatility, if you think the worse is past and we are unlikely to have any further "events" in the market, then go with libor.
As a note, Libor is purely a reference rate fixed at 11am daily, to indicate where commmercial banks would be happy to lend money to each other.
Prior to last week when the BofE changed rates, base had been at 5% since April,,,Libor rates fix daily and are far more volatile taking into account good and bad news over the next 90 days (for 3mth fix)...right now With a 4.5% base, Libors could be anywhere between 4.85-7%+ ???? going forward.
If you want to follow 3mth libor rates,,have a look at the short sterling futures contract, these are fixed based on the 3mth libor rate at expiration.......futures price = 100-expected libor i.e 100-93.5 = expected 6.5 libor...so if you look at dec07,mar08,jun08 etc....it will show market expectations.
As stated base is more of a stable rate,,,libors fixed weekdays , so there are approx 250 a year,, you have more event risk on the fix,,,quite a few derivatives use the average fix over a period for this reason.
Good luck in your choice.
bluevelvet said:
Don't get caught in the libor trap!
With base you are in line with the economy, with Libor you are taking a view on the credit spreads of the banks improving.....
If the economy worsens,,,,bank credit spreads and libor will move out and reasonable chance central banks cut base further.
In a normal environment (distant memory) we have had 3m libor say 25 bp over base ticking along......then if the market is anticipating an aggressive rate cut of say 50bp.....in a couple of days,,,,the 3m libor would price the next 90 days at or below the current base rate (inverted curve)...as effectively it would be the sum of the next 90 days at the new lower rate, plus a little term premium....Not likely at the moment...spreads are way out at 160bp+
That said we are not in a normal environment, central banks have pumped billions going on to trillions into the money markets and as yet libors have not come into anything like spreads of normal times...
If we have more problems in the financial markets, such as a CDS implosion??? then certain banks will be in the frame, other banks will not be happy to fund libor rates and credit spreads go back out.
Obviously it depends on the term of your loan and the frequency of your fixings.....
BofE base is the safer option.
Libor option has far more implied volatility, if you think the worse is past and we are unlikely to have any further "events" in the market, then go with libor.
As a note, Libor is purely a reference rate fixed at 11am daily, to indicate where commmercial banks would be happy to lend money to each other.
Prior to last week when the BofE changed rates, base had been at 5% since April,,,Libor rates fix daily and are far more volatile taking into account good and bad news over the next 90 days (for 3mth fix)...right now With a 4.5% Libors could be anywhere between 4.85-7%+ ????
If you want to follow 3mth libor rates,,have a look at the short sterling futures contract, these are fixed based on the 3mth libor rate at expiration.......futures price = 100-expected libor i.e 100-93.5 = expected 6.5 libor...so if you look at dec07,mar08,jun08 etc....it will show market expectations.
As stated base is more of a stable rate,,,libors fixed weekdays , so there are approx 250 a year,, you have more event risk on the fix,,,quite a few derivatives use the average fix over a period for this reason.
Good luck in your choice.
"With base you are in line with the economy, with Libor you are taking a view on the credit spreads of the banks improving....."With base you are in line with the economy, with Libor you are taking a view on the credit spreads of the banks improving.....
If the economy worsens,,,,bank credit spreads and libor will move out and reasonable chance central banks cut base further.
In a normal environment (distant memory) we have had 3m libor say 25 bp over base ticking along......then if the market is anticipating an aggressive rate cut of say 50bp.....in a couple of days,,,,the 3m libor would price the next 90 days at or below the current base rate (inverted curve)...as effectively it would be the sum of the next 90 days at the new lower rate, plus a little term premium....Not likely at the moment...spreads are way out at 160bp+
That said we are not in a normal environment, central banks have pumped billions going on to trillions into the money markets and as yet libors have not come into anything like spreads of normal times...
If we have more problems in the financial markets, such as a CDS implosion??? then certain banks will be in the frame, other banks will not be happy to fund libor rates and credit spreads go back out.
Obviously it depends on the term of your loan and the frequency of your fixings.....
BofE base is the safer option.
Libor option has far more implied volatility, if you think the worse is past and we are unlikely to have any further "events" in the market, then go with libor.
As a note, Libor is purely a reference rate fixed at 11am daily, to indicate where commmercial banks would be happy to lend money to each other.
Prior to last week when the BofE changed rates, base had been at 5% since April,,,Libor rates fix daily and are far more volatile taking into account good and bad news over the next 90 days (for 3mth fix)...right now With a 4.5% Libors could be anywhere between 4.85-7%+ ????
If you want to follow 3mth libor rates,,have a look at the short sterling futures contract, these are fixed based on the 3mth libor rate at expiration.......futures price = 100-expected libor i.e 100-93.5 = expected 6.5 libor...so if you look at dec07,mar08,jun08 etc....it will show market expectations.
As stated base is more of a stable rate,,,libors fixed weekdays , so there are approx 250 a year,, you have more event risk on the fix,,,quite a few derivatives use the average fix over a period for this reason.
Good luck in your choice.
Is there a strict relationship here?
Noel, as you know...the base rate may or may not be in line with the economy,at a particular point in time, sure they should have eased sooner, but you may have been hurt a lot more if you had been on a libor fix when the economy fell apart. We could debate for hours how the credit spreads of banks and central banks are now afeected in the proposed new regime..
The point being the base potentially has less variables affecting it than a libor rate....read on for other potential differences in volatility of fix .
I was only trying to assist the original poster with a little colour as to the difference implications of a base rate and libor fix.....I didn't get the impression he was totally sure, hence asking for other views.
I will leave you all to it...have fun...
The point being the base potentially has less variables affecting it than a libor rate....read on for other potential differences in volatility of fix .
I was only trying to assist the original poster with a little colour as to the difference implications of a base rate and libor fix.....I didn't get the impression he was totally sure, hence asking for other views.
I will leave you all to it...have fun...
Edited by bluevelvet on Thursday 16th October 16:24
Edited by bluevelvet on Thursday 16th October 16:40
bluevelvet said:
Noel, as you know...the base rate may or may not be in line with the economy,at a particular point in time, sure they should have eased sooner, but you may have been hurt a lot more if you had been on a libor fix when the economy fell apart. We could debate for hours how the credit spreads of banks and central banks are now afeected in the proposed new regime..
The point being the base potentially has less variables affecting it than a libor rate....read on for other potential differences in volatility of fix .
I was only trying to assist the original poster with a little colour as to the difference implications of a base rate and libor fix.....I didn't get the impression he was totally sure, hence asking for other views.
I will leave you all to it...have fun...
Sorry, I quoted to much. What I meant to quote was The point being the base potentially has less variables affecting it than a libor rate....read on for other potential differences in volatility of fix .
I was only trying to assist the original poster with a little colour as to the difference implications of a base rate and libor fix.....I didn't get the impression he was totally sure, hence asking for other views.
I will leave you all to it...have fun...
Edited by bluevelvet on Thursday 16th October 16:24
Edited by bluevelvet on Thursday 16th October 16:40
"with Libor you are taking a view on the credit spreads of the banks improving"
and say that I'm not sure this relationship is holding at the moment. The banks credit spreads improved massively over the last week or so after the bailout (for example, RBS is down from 300bps to below 100bps), whereas LIBOR hasn't tightened a massive amount. But I guess we are overanalysing, and as someone else said, none of us have a crystal ball.
Noel, with respect to libors and credit spreads, the point being, when the banks feel more comfortable with the integrity of other counterparties, they will most likely resume lending to each other at more competitive rates.
With base rates, set by a central bank, the implication being, that you do not have the effect of credit default built into the rate, hence more stability. (increased debt issuance and implications on sovereign credit...yes,,perhaps another thread?)
There are short term and longer term views and a snap photo of CDS and credit spreads at different times during recent trading days can lead to different interpretations.
The fact that Libor spreads are still wide, gives some indicator of the potential uncertainty when using them as a reference rate.
Even I know a market exists as not everyone has the same view or position at the same time, hence related discussions could go on for hours, however the original poster asked a question about Libor and base rate benchmarks.
Rather than pick up on individual lines from my reply, surely it would have been far easier for you to write out the definitive response on such spreads to the original poster, who by his and my own admission clearly do not have anything like your own understanding of the subject matter.
With base rates, set by a central bank, the implication being, that you do not have the effect of credit default built into the rate, hence more stability. (increased debt issuance and implications on sovereign credit...yes,,perhaps another thread?)
There are short term and longer term views and a snap photo of CDS and credit spreads at different times during recent trading days can lead to different interpretations.
The fact that Libor spreads are still wide, gives some indicator of the potential uncertainty when using them as a reference rate.
Even I know a market exists as not everyone has the same view or position at the same time, hence related discussions could go on for hours, however the original poster asked a question about Libor and base rate benchmarks.
Rather than pick up on individual lines from my reply, surely it would have been far easier for you to write out the definitive response on such spreads to the original poster, who by his and my own admission clearly do not have anything like your own understanding of the subject matter.
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