Early every morning at Cumberland an email is sent around to all folks in the firm who touch portfolios. LIBOR rates are part of the dataset.
An estimated $150 trillion worldwide is US-dollar-based (includes derivatives), with the interest rates reset from LIBOR. Real estate finance is a heavy user of LIBOR. Many other sectors are, too.
On the day this was drafted, 3-month LIBOR was 0.94806. 6-month was 1.29100. 1-year was 1.64400. The standard semiannual compounding period forward rate reveals the estimate of 3-month LIBOR three months from now to be 1.67383, while 6-month LIBOR six months from now is expected to be 2.03486.
Forward rates do not guarantee outcomes. They do give you a market-based pricing of what is expected.
LIBOR forwards are saying the baseline scenario for the nongovernmental guaranteed shorter-term finance level is going to be 2% next year. LIBOR rates include risk analysis and allowances for central bank decisions. For US dollar investors, that means the Fed.
These rates are persisting well after the money market shifts of last October and well after the US election, ECB policy decisions, and the Italian referendum and Austrian election, etc.
So the question for investors is, what will market agents do when they see a 2% number as an option for moderate risk taking in short-term alternatives. That question hasn't be posed for almost a decade.
In 2017, such questions will become more common. The US is undergoing a regime change. The period (35 years) of a tailwind is over. US dollar interest rates hit a generational low in July after Brexit. LIBOR is one of the series that has confirmed it.
For Cumberland that means total-return bond management is more active. Duration shifts and portfolio adjustments are needed more often. And opportunity can be seized, as bond volatility is higher now and likely to remain so.
Wizards of Bondland, we're not in Kansas anymore.