Shares of companies loaded with floating-rate debt are feeling the pinch from the climb in LIBOR. The 3-month London interbank overnight rate has risen to 2.3%, outpacing the speed at which the Federal Reserve has raised its benchmark interest rate. The sharp climb in LIBOR hasn’t changed the bullish outlook for equity analysts at Goldman Sachs, who say strong earnings should ease the burden of managing heftier debt loads, but they said stocks of companies making extensive use of floating rate debt would see fiercer headwinds in a backdrop of overall downtrend for US equities.
New money market regulations, a deluge of issuance by the Treasury Department and the new US tax law have contributed to what many say will prove a temporary bump in short-term borrowing costs. Short-lived or not, LIBOR’s rise could push up interest costs for $2.2 trillion worth of adjustable rate corporate loans.
Stocks with a significant amount of floating rate debt on their books are underperforming their benchmark indexes. As the spread between the fed-funds rate and Libor has widened, S&P 500 firms with more than 5% of debt tied to adjustable rates have fallen behind the S&P 500 by 3.20%, and were down 4% for the year.