Did You Know…
That LIBOR, the benchmark that underpins over $350 trillion in securities, is scheduled to end in 2021? The Financial Conduct Authority (FCA) which has served as the regulatory agency responsible for overseeing LIBOR, has been on a quest to ensure that contributing banks do not leave prior to 2021 before transitions to new benchmarks have been solidified.
Most corporate bond terms state that if LIBOR is no longer available and the calculation agent can’t get submissions from banks, then LIBOR will become fixed at the most recently reported value. This would cause floating rate securities to have fixed rate exposure, potentially exposing investors to significantly lower coupons over the life of the security. Many argue that while the phase out of LIBOR is still years away investors are accepting market risk by buying LIBOR-based floaters with maturities extending beyond 2021. They suggest that investors be compensated for that risk with additional spread or contractual protections and spread curves should steepen for floating rate exposure maturing beyond 2021 to reflect this.
Are you positioned to monitor the fixed income landscape? There are a lot of moving parts like, market fluctuation, economic and legislative changes not to mention the various structures of bond offerings and the different ways to analyze those. We believe active bond management is prudent. As active managers, we position our income portfolio to take advantage of rising rates by actively monitoring credit valuations, interest rates and yield spreads. We believe good credit and covenant analysis can yield relative value in this current environment.
Source: Barclays, US Credit Research Libor Worries Afloat, August 2017
This information is intended solely to report on investment strategies and opportunities identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Please contact us at 646-452-6700 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions, or if you would like to request a copy of our Code of Ethics. Our current disclosure statement is set forth on our Form ADV Part II, available for your review upon request, and on our website, www.rooseveltinvestments.com.