Credit Stress Evident in TAF, TED Spreads, Elsewhere

Credit dislocations continue to foster. Evidence can be found in corporate bonds, preferred shares, hybrids, the Ted Spread, and even in the most recent Term Auction Facility (TAF) auctions. Let's take a look. First,  a chart of the Ted Spread, courtesy of Bloomberg, which has the closing value of 3.00 + 0.499.



(click charts to enlarge)

The TED spread is the difference in yields between inter-bank and U.S. Government loans.

Initially, the TED spread was the difference between the interest rate for the three month U.S. Treasuries contract and three month Eurodollars contract as represented by the London Inter Bank Offered Rate (LIBOR). However, since the Chicago Mercantile Exchange dropped the T-bill futures, the TED spread is now calculated as the difference between the three month T-bill interest rate and three month LIBOR. The TED spread is a measure of liquidity and shows the degree to which banks are willing to lend money to one another.

The TED spread can be used as an indicator of credit risk. This is because U.S. T-bills are considered risk free while the LIBOR rate reflects the credit risk of lending to commercial banks. As the TED spread increases, the risk of default (also known as counterparty risk) is considered to be increasing, and investors will have a preference for safe investments.

Professor Bennet Sedacca ha a few comments on Minyanville today inCredit Market Misery.

The credit market is getting eviscerated. Period. Whether it is corporates, preferreds or hybrids, spreads continue to blow out. The Goldman (GS) preferred I bought the other day at 11.5%? Gonzo. Thank you Warren.

Don't let the stock market fool you. The credit market is imploding.

The credit market has been a great leading indicator for stocks lately.

For a more detailed look into this topic, please see A Tale of Two Markets.

Inquiring minds just might be wondering how the Term Auction Facility (TAF) is performing. Let's take a look at the two most recent auctions.

TAF Release Date: September 10, 2008: On September 9, 2008, the Federal Reserve conducted an auction of $25 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:

Stop-out rate: 2.530 percent

Total propositions submitted: $46.237 billion

Total propositions accepted: $25.000

Bid/cover ratio: 1.85

Number of bidders: 53

TAF Release Date: September 23, 2008: On September 22, 2008, the Federal Reserve conducted an auction of $75 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:

Stop-out rate: 3.750 percent

Total propositions submitted: $133.562 billion

Total propositions accepted: $ 75.000 billion

Bid/cover ratio: 1.78

Number of bidders: 85

Note that the number of bidders soared from 53 to 85 and the yield went from 2.53% to a whopping 3.75%

Demand For Cash Is Huge

The current discount rate is 2.25%. Banks are now willing to swap collateral with the Fed for 3.75%. Odds of that collateral being marked to market in these pawn shop swaps is virtually zero.

Comments

[curiousJC:]

good stuff.thanks

2008 Sep 24 10:51 PM

[flow5:]

Those are pseudo economic relationships that lie in the FED's wake.

2008 Sep 25 01:38 PM