Libor Keeps Rattling U.S. Stocks Even as Its Replacement Debuts

(Bloomberg) -- The London interbank offered rate is wreaking havoc on U.S. equity markets, refusing to go quietly into retirement.

Shares in companies with a significant portion of floating-rate debt have been fluctuating in line with short-term borrowing costs tied to Libor, according to a study by a Goldman Sachs Group Inc. team of strategists including Ben Snider and David Kostin. Rising rates are only a “modest” threat to the market at large, according to the analysts, but they've been instrumental in delineating between winners and losers in 2018.

“From a strategic perspective, the backdrop of elevated corporate leverage and tightening financial conditions drives our continued recommendation to own stocks with strong balance sheets,” Snider and Kostin wrote.

Ripple effects emanating from Libor's ebbs and flows are cascading across the U.S. equity markets even as the measure is supposed to be on its way out after a scandal-ridden couple of years. Its replacement, the Secured Overnight Financing Rate, debuted Tuesday morning, and Libor is supposed to be phased out entirely by the end of 2021.

Goldman's study -- which looked at a basket of 50 S&P 500 companies with floating-rate debt in excess of 5 percent of total obligations -- found that their shares lagged behind the broad U.S. equity benchmark by 3.2 percentage points in the first quarter this year.

Three-month Libor has surged to its highest level since 2008 amid rate hikes from the Federal Reserve as well as technical factors related to heavy Treasury bill issuance and the tax U.S. overhaul bill.

To contact the reporter on this story: Luke Kawa in New York at lkawa@bloomberg.net.

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Brendan Walsh, Eric J. Weiner

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