LIBOR Curve
Candlefocus EditorThe LIBOR curve is a graphical representation of yield curves for various short-term LIBOR maturities, ranging from overnight up to several months in duration. It is used to determine the cost of borrowing for a variety of debt markets and is viewed as a predictor of expected future interest rate movements.
The LIBOR curve is an important tool for investors, banks, corporations, and government agencies. Financial institutions use the curve to decide on the best allocation of their debt products. Banks and other lenders use the LIBOR curve to determine the cost of borrowing money from other institutions and to manage the liquidity of their own portfolios. Corporations and agencies can use the curve to assess the risk associated with their investments and identify the best borrowing opportunities available.
The transition from LIBOR to other benchmark rates, such as the Security Overnight Financing Rate (SOFR), began in 2020. The SOFR is a U.S. dollar overnight indexed based rate with monthly and quarterly maturities. It is expected to eventually replace LIBOR as the benchmark rate as most countries implement new legislation to solidify the switch.
The LIBOR curve is a crucial representation of market conditions. Its ability to provide a snapshot of the current and expected future borrowing rates of debt markets can help investors, financial institutions, and corporations to make informed decisions. As the transition to the alternative benchmark rates is underway, investors and institutions must assess their current positions and ensure that their portfolios are up-to-date with the most current rates and regulations.