The market may be rising, but at least one indicator is sending a strong warning signal. The TED spread, rather than declining as the market rose since the beginning of October, has continued to climb steadily higher.
While some may write this off as only one single indicator sending a negative signal, we think that there are strong grounds to pay attention to the TED spread. The risk to the world economy from European government debt problems is largely a function of whether the large banks that have exposure to the risky debt fail. The TED spread, showing the difference between what rate banks are lending to each other and the short term Treasury bill rate, is a good proxy for the tensions in the credit markets. If the TED spread is rising, than we can see that banks are becoming increasingly reluctant to lend to each other.