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This ‘wonky’ source could take financials higher: Trader

The financials are in the midst of a major comeback, and that the catalyst could come from an unlikely source, says one trader.

Focusing on the London Interbank Offered Rate, CNBC "Fast Money" trader Brian Kelly said he expects to see a swift move higher in financials.

"This is kind of a wonky thing, but you might remember it from back in 2008 when we watched it every single day," he said in reference to the Libor scandal where banks were found to be misrepresenting interest rates and eventually led to Deutsche Bank having to pay $2.5 billion in fines.

However, during a "Behind the Trade" special, Kelly explained that the rate can be a useful tool when investors want insight into where financials are heading.

"The Libor three-month rate is what a lot of adjustable loans are set against," said Kelly. "Over the last year, you saw a big spike and then, just recently, you saw another spike."


Currently, the rate is close to 1 percent in the Libor market. The technical reason for this, Kelly said, is because some money market mutual funds can't own some Libor products as of October.

"So, they've been selling them and making the yield go higher," Kelly said. "But the interest rate for adjustable-rate loans actually could go higher, so that's why I think the financials are a buy."

Going back to the 2011, the financial sector ETF, the XLF, has gained 97 percent but is down 5 percent in the last year.


"Now, we've broken out," Kelly said, highlighting a trend line drawn across the recent highs. "I think you can buy the financials, and the reason why is because they're going to adjust those adjustable-rate loans, mortgages, car loans and student loans to higher."

From here, Kelly sees Libor's margins getting a little bit better and that will help to lead financials higher.