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Comparing loan interest rates and secondary market rates

Ken Hartzfeld and Brian Legarth

This graph examines the interest rate on large loans from the London [Bank] interbank market over a monthly basis. Generally, higher interest rates indicate that the economy is stable enough to handle them. Looking at the graph you can recognize that interest rates haven't been above 2% since the Great Recession, and in the last data collection, they have broken the 2% barrier. This is indicating that the global economy is strong.

A secondary market is where individuals buy and sell securities that they own. Most common secondary markets are the NYSE or NASDAQ. The Secondary market rate measures the price of stocks being exchanged. The Secondary market rate in this graph has also increased above the 2% mark for the first time since the Great Recession, which indicates that people are spending more and with more trust in a stable economy.

These two graphs both show rates at which financial transactions take place. LIBOR [The London Bank] measures interest rates while the secondary market rate measures stock exchange prices. Both are strong indicators of an economy's stability and growth potential. These two graphs are showing strong signals of a growing economy both domestically and internationally. If I were the hypothesize, the graphs will continue to rise, but if they get too high it is grounds for concern as they could crash again as they did in the Great Recession.

4 thoughts on “Comparing loan interest rates and secondary market rates

  1. Lauren Fredericks

    It's interesting to see how long it took following the Great Recession for interest rates to rise again. It makes sense that the FED is hesitant following such economic turmoil. I remember looking at graphs that view the US economy following recessions since the 1950's to present, and each "bounce back" from a recession takes longer and longer for the economy to recover (including interest rates). I wonder if it is the same with the London Bank. Regardless, I think it would be interesting to look at these trends.

  2. spencerc20

    It's good to see that these markets are slowing starting to bounce back following the Great Recession. Hopefully this trend will continue, but it shows that it's important for the banks and consumers to be watching interest rates to see what will be worthwhile to do both when interest rates are extremely low and when they seem to be getting too high.

  3. warej20

    It was neat to observe the slow recovery of both the U.S and international economies following the Great Recession. It makes sense that initially citizens would be hesitant to trust economic markets following events like the crash of the housing market. High interest rates and higher stock prices do indicate growing confidence in the economy and I agree in that I believe they will continue to rise.

  4. the prof

    LIBOR is an interest rate on "offshore" US dollar loans between international banks in London. Two digressions, then substance. (1) The offshore market originally developed because of US threats to seize assets (think the USSR under Brezhnev and China under Mao) meant that some countries that took part in international trade didn't want to put their proceeds in banks in the US. With the First Oil Crisis many OPEC members kept their money there, too – wisely, in the case of Iran, as the US did freeze assets. This rate tracks the comparable maturing Treasury rates closely, but can diverge in times of political and economic upheaval. (2) This past decade the banks engaged in a price rigging cartel, and were busted for antitrust violations. Big fines paid to the UK government, but I didn't follow the details, I don't know if there were any criminal convictions.

    Now the economics. At least before the cartel was discovered, the assumption was that this better indicated supply and demand for short-term funds (1-, 3- and 6-month loans) than in the US, because it wasn't as directly linked to US monetary policy. But as the graph below shows, it's really only in unusual times that the two diverge. Second, we should remember it is a NOMINAL interest rate. What is the "real" interest rate, corrected for inflation in the US? Third, there are LIBOR rates for the British pound, the Euro, the Japanese yen and the Swiss franc, and for an array of "minor" currencies. An interesting question is how those move / diverge from one another. Is there today a "global" interest rate regime?


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