Treasury Yields Hold Steady, End of LIBOR Coming

The 10 year T continues to trade in a tight range around 2.25-2.30%.  Yields dropped yesterday due to anemic market data including a larger than expected decline in auto sales.  An interesting report surfaced yesterday indicating that inflation is “lurking beneath the surface” based on rising commodity prices that should affect consumer prices in late 2017 and early 2018.  As of now, Treasury yields aren’t reflecting that expectation.  Today’s Treasury Department announcement regarding 3^rd quarter issuance did not include any announcement of issuance of ultra long (50 and 100 year term) bonds, even though a May 2017 announcement indicated they were considering the possibility.  This should help demand for 10 and 30 year bonds.  LIBOR Replacement Update:  The quest to replace LIBOR has been in the works since 2013 in the wake of the LIBOR fixing scandal.  The UK Financial Conduct authority recently announced that the goal to transition to alternative benchmarks is now the end of 2021.   Note that over $300 trillion of financial instruments (derivatives, swaps, etc) are tied to LIBOR at present.   It looks like the US is settling on a Treasury overnight repurchase (repo) rate based on the cost of overnight loans that use US Treasuries as collateral.   This rate will be regularly published beginning next year and is an indicator of a highly liquid market (about $660 billion in daily volume).    It looks like the UK will be using the Sterling Overnight Index Average (SONIA), other Euro countries may use EONIA (Euro Overnight Index Average), while Japan is leaning towards TONAR (published by the Bank of Japan).   Only the US alternative is a “secured” rate as it is backed by Treasuries.   The other rates are similar to existing LIBOR as they are not collateralized and will have to be closely monitored to avoid the corruption charges that doomed LIBOR.  Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners.