We use cookies on our website to enhance your browsing experience. By continuing to use this site without changing your settings you consent to our use of cookies in accordance with our cookie policy. To learn more about cookies, how we use them on our site and how to change your cookie settings please view our cookie policy.

Close Cookie Bar

What have we been up to


Donec varius pellentesque metus, at vehicula magna egestas quis. Sed purus ipsum, vehicula id libero laoreet, posuere ornare urna. In eu nulla leo. Nullam pellentesque dolor nec scelerisque consequat.

LIBOR–OIS Spread: harbinger of another crisis?

Share on Linkedin
+ -
If you thought this page is useful to your friend, use this form to send.
Friend Email
Enter your message

Ever since the LIBOR–OIS spread shot up from single digit basis points to well over 300 bps during the financial crisis, the gap between the two has been closely watched as a sign of stress in the financial markets. With OIS being almost risk free, the spread is viewed as a measure of short-term liquidity and credit risk. As the chart below shows, this spread has widened significantly over the past couple of months with a jump of over 11 bps since February 19.

The last time the spread hit these levels was in September 2016, however money market reform was, at that time, driving Libor higher and seen as the main driver of the spread. Once US prime funds stabilized after the rules came into effect in October 2016, the spread slowly returned to its 10-15 bp range. Before that the spread peaked at 50 bps in January 2012 during the Eurozone debt crisis.

*Source: Bloomberg, as of Mar. 2, 2018

So what’s driving the spread this time around and are we looking at an early warning sign of another credit crisis? One of the drivers being touted is the recent tax reform and, specifically, cash repatriation: as US companies repatriate cash (and use it for M&A activity, dividend payments, etc.), the pool of overseas cash declines and banks lose large providers of short term funding.

Another possible driver is the record supply of Treasury bonds so far this year while the Fed, formerly a large buyer, is starting to unwind their Treasury purchases made during the QE programs.

Finally, with the probability of a Fed hike on March 21 at 100% and the odds of a hike in June over 80%, another possible driver is the less liquid tenors demanding a premium which should disappear as the rate hikes are realized.

We think the recent widening of the spread is a due to a perfect storm of drivers that will dissipate in the coming months. Nevertheless, for floating rate payers impact is clear: the LIBOR portion of their cost of funds has roughly doubled in the space of a year. 



La Sofferanza Italiana

1stDecember 2016

After the turmoil of Brexit and the US Presidential election, this week the spotlight for political upheaval falls firmly on...

read more

End of the road for Libor

31stJuly 2017

  “At what rate could you borrow funds, were you to do so by asking for and then accepting interbank...

read more

How can we help you

Have you got a question about how you hedge your financial risks, or structure and arrange your debt?

Find out how we can help you by contacting us today.


contact us

Stay Connected

Would you like news and views on local and global financial markets?

Sign up today to receive news straight to your inbox.

At JCRA the privacy of your personal information is of utmost importance to us. You can find details in our Privacy Policy and Terms of Use.