LIBOR Curve

LIBOR Curve

Key takeaways

• The LIBOR curve plots short-term LIBOR rates against their maturities, showing the term structure of interbank lending rates.
• Common LIBOR maturities range from overnight (spot next) up to 12 months.
• Curve shape (normal, inverted, flat) signals market expectations for future rates and economic activity.
• After manipulation scandals, regulators moved to replace LIBOR with alternative, transaction‑based benchmarks such as SOFR and SONIA; the transition began in 2020.

What is the LIBOR curve?

The LIBOR curve is the graphical representation of the London Interbank Offered Rate (LIBOR) across different short-term maturities. LIBOR is the benchmark rate at which large, creditworthy banks lend to one another in the London interbank market. Plotting LIBOR rates against maturity creates a yield curve that reflects expectations for short‑term funding costs.

Maturities and construction

The LIBOR curve typically spans seven short-term tenors:
* Overnight (spot next, S/N)
* One week
* One month
* Two months
* Three months
* Six months
* 12 months

Each point on the curve represents the market’s prevailing LIBOR rate for that maturity. Although LIBOR is not theoretically risk‑free, it has served as a widely used proxy for short‑term floating rates.

Yield curve shapes and their signals

The slope of the LIBOR curve provides insight into market expectations:
* Upward-sloping (normal): longer maturities carry higher rates than short maturities, often associated with economic expansion and rising future rates.
* Downward-sloping (inverted): short-term rates exceed long-term rates, historically a warning sign of a potential recession.
* Flat: little difference between short- and long-term rates, indicating uncertainty about future economic direction.

Why the LIBOR curve matters

• Benchmarking: LIBOR historically underpinned pricing for many short-term loans, floating-rate debt, and derivatives.
• Risk and pricing: It served as a reference for the risk/return tradeoff on short-term instruments and was used in valuing interest rate swaps and other contracts.
• Market expectations: Movements in the curve provide a near‑term view of funding cost expectations and economic sentiment.

Criticism and reform

Following the 2008 financial crisis, investigations revealed manipulation of LIBOR submissions by some contributor banks. The scandal prompted regulatory action, including oversight changes and a push to replace LIBOR with more robust, transaction-based reference rates. The transition away from LIBOR began in 2020, with replacement benchmarks such as:
* SOFR (Secured Overnight Financing Rate) — widely adopted in USD markets
* SONIA (Sterling Overnight Index Average) — used in GBP markets

Regulators and market participants have phased contracts toward these alternatives to reduce reliance on judgment-based submissions and lower manipulation risk.

Bottom line

The LIBOR curve provided a central view of short-term interbank borrowing costs and influenced pricing across money markets and derivatives. Due to manipulation issues and regulatory reform, markets have been migrating to alternative, transaction-based benchmarks (SOFR, SONIA), changing how short-term term structures are constructed and used.