libor/swap kink in curve between 12m to 18m

nomoretechno · July 16th, 2012, 7:46 am

HiWhy is there a massive kink in the current libor/swap cuvre between GBP libor 12m and 18m swaps (and to a lesser extent in the EUR and USD curves). I realise that these are two different markets superglued together to get a curve, but seems to me that this would not explain the massive difference. (libor 12m is 1.65% versus 18m swap of 0.9%). Is there a apples/oranges calculation difference or is it something else?thankst

Martinghoul · July 16th, 2012, 2:00 pm

Yes, this is an apples/oranges calculation that has been addressed countless times on this here forum (and elsewhere, I presume). You cannot compare a 12m LIBOR fixing to an 18m swap rate (which is vs 3m or 6m LIBOR), as that's just plain wrong. So no, there's no kink, you're just doing it wrong.

nomoretechno · July 18th, 2012, 2:45 pm

Yep, I know I'm doing it wrong, hence the question.1Y swaps are currently 0.94 on bloomberg, then the 1y ZC spot rate won't be a million miles above that yet 12m libor is 1.57. As libor is a spot rate, this seems way to high.

Martinghoul · July 18th, 2012, 3:09 pm

QuoteOriginally posted by: nomoretechnoYep, I know I'm doing it wrong, hence the question.1Y swaps are currently 0.94 on bloomberg, then the 1y ZC spot rate won't be a million miles above that yet 12m libor is 1.57. As libor is a spot rate, this seems way to high.You may need to rethink this particular assumption "1y ZC spot rate won't be a million miles above the 1y swap". Or at least you may need to define more precisely what sort of a 1y ZC rate you're actually referring to. That's in addition to doubts about the meaning of the 12m LIBOR fixing.

secret2 · July 18th, 2012, 4:11 pm

Does BBG build any LIBOR curve that is ready to be used? Or at least they should acknowledge which segment of the apple-glued-to-orange curve comes from which class of security?

Martinghoul · July 18th, 2012, 8:28 pm

QuoteOriginally posted by: secret2Does BBG build any LIBOR curve that is ready to be used? Or at least they should acknowledge which segment of the apple-glued-to-orange curve comes from which class of security?As far as I am aware, BBG does the right thing these days...