TED Spread Creeping Steadily Higher

Jun.17.10 | About: Vanguard Financials (VFH)

For all the bailouts that have been arranged, safety nets that have been put into place, rules that have been bent, rights that have been trampled, and money that has been spent trying to "fix" the financial system, conditions still haven't returned to "normal."

In fact, as Trader's Narrative notes in "Financial Stress Indexes Rising (Again)," some canary-in-the-coal-mine indicators, including the widely-watched "TED spread," have been creeping steadily higher over the past few months. The same holds true for a less well known gauge of trouble ahead:

Another way to measure the financial stress in the markets is through the St. Louis Fed’s Financial Stress Index which aggregates several components, including the TED spread:

Interest Rates:

Effective federal funds rate

2-year Treasury

10-year Treasury

30-year Treasury

Baa-rated corporate

Merrill Lynch High-Yield Corporate Master II Index

Merrill Lynch Asset-Backed Master BBB-rated

Yield Spreads:

Yield curve: 10-year Treasury minus 3-month Treasury

Corporate Baa-rated bond minus 10-year Treasury

Merrill Lynch High-Yield Corporate Master II Index minus 10-year Treasury

3-month London Interbank Offering Rate–Overnight Index Swap (LIBOR-OIS) spread

3-month Treasury-Eurodollar (TED) spread

3-month commercial paper minus 3-month Treasury bill

Other Indicators:

J.P. Morgan Emerging Markets Bond Index Plus

Chicago Board Options Exchange Market Volatility Index (VIX)

Merrill Lynch Bond Market Volatility Index (1-month)

10-year nominal Treasury yield minus 10-year Treasury Inflation Protected Security yield (breakeven inflation rate)

Vanguard Financials Exchange-Traded Fund (NYSEARCA:VFH)

You can get more information about it from the St. Louis Fed website. The interesting thing to glean from this chart is that, unlike the TED spread, the St. Louis Financial Stress index never really returned down to “normal” levels (below zero):

Stressindex

For data junkies, there is also the Kansas City Financial Stress Index which is a similar composite. But it is updated monthly, rather than weekly. The latest index data is for May (+0.31) which is showing a similar increase from the previous months level (-0.24 in April).

To conclude, these types of data are telling us little more than what we already know. The world economy is fragile. The response of world governments to the credit and debt crisis has been to substitute sovereign debt in lieu of private debt held by financial institutions. The plan was that, things would return to normal and then things could be unwound. The problem is that stresses are not subsiding.