Being in finance, I've caught on to how well future predictions of interest rates can actually give a good bearing on what might happen financially in the future.
If the market is predicting higher interest rates, then that means things are likely to continue to get better. But if the market is predicting for interest rates to head lower, then there could be some financial hiccups on the horizon.
One of my favorite tools to view this is Chatham Financial's Forward LIBOR Curve. LIBOR stands for London Interbank Offered Rate and it is the rate that London banks (and U.S. and European banks with London operations) charge each other to borrow money.
What is great about LIBOR is that it is set by the market and not by the Federal Reserve or other monetary authorities. Because of this, it is used as the base rate for all sorts of loans. In commercial real estate as an example, loan interest rates are often quoted as 1 month LIBOR + 3% or something like that depending on the risk of the investment and the borrower. Chatham tracks 1 month LIBOR, 3 month LIBOR, and a new rate called SOFR (Secured Overnight Financing Rate) that may end up replacing LIBOR in a couple years.
The market participants are constantly betting and hedging on where LIBOR and SOFR will be in the coming months. Chatham does the best job of tracking these predictions.
The image shows where the predictions currently stand. As you can see, the market is not predicting smooth sailing quite yet. It is anticipating bumps starting soon (likely because of the uncertainty with the Presidential election) clear through summer of 2022 where rates get historically low (meaning it could get ugly financially between now and then).
So we aren't out of the woods yet even though if you look at current stock market prices, they are predicting we are. Continue to be careful with the amount of risk you are taking in this environment. I will continue to provide updates on a periodic basis on this important metric.
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