TED Spread's Low Levels Reflects Confidence in Counterparty Risk

The TED spread (the difference between 3-mo. LIBOR and 3-mo. T-bills) has completely normalized. Currently it's at 19 bps (its close cousin, the OIS spread is down to 14 bps), which is the same level that prevailed during much of the 2001-2003 period. Easy money and weak growth expectations, coupled importantly with strong confidence in counterparty risk, is what drives the TED spread to these relatively low levels.

If growth expectations weren't so weak, then the market would be expecting the Fed to raise rates soon, and 3-mo. LIBOR would rise; bill yields would be trading at least as high as the funds rate, if not a bit more. Instead, LIBOR is trading at 0.32%, just a smidge above bills which are at 0.13%. If counterparty risk weren't so strong, then LIBOR would be trading well above bills, because lenders would be wary of lending on the LIBOR market and would instead prefer to give up yield in order to get the safety of bills.

So the market has a dim view of the economy's ability to grow, which can also be seen in the recent selloff in the stock and corporate bond markets. But at least we have overcome the very significant problem of counterparty risk. That was really at the heart of the meltdown last year. On balance I'd say this adds up to good news.

Comments

[LKofEnglish]

and the Fed and Treasury cleared the trade for the trillions which amazingly caused a rise in price and fall in yields. this is real money and is real stimulus. don't see unemployment falling anytime soon with this stimulus either so that's another arrow in the quiver of profitability. since its all debt induced and taxpayers (aka "the consumer"?!!!) can't fit the bill all this money must be borrowed going forward which means so called DEMOCRATIC government is more beholden to profit making machines than all those "evil Republicans" ever could dream of and combined with zero percent interest rates as banks are forced to lend to business i think yields some heavy duty growth in profits and explains quite nicely why the stock market "refuses" to sell off. in short--the "plunge protection team" starting with Hank Paulson has by and large succeeded. Strangely we have a President "renominating" Bush's economic team because they "saved us from the Great Depression." Personally I don't think they've "save us" from anything--but if the East Asians want to buy all this worthless debt so we can rebuild the entire US Highway system, why not, right? People who bank to bullish scenario on rising commodity prices I think are being just truly GREEDY in here. Think this market rises on its own and animal spirits (Hi, I'm from Ford Motor Company and I'm here to take over the world) kick in.

2009 Sep 04 11:50 AM

[Stimpy]

BS

The TED spread measures nothing these days. The Government has socialized the credit markets with 24T in giveaways and guarantees.

All TED measures is the ongoing arb.

When credit is re-privatised (if) THEN spreads will matter again.

2009 Sep 04 03:37 PM