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Thread: weekend commentary - time to check the TED Spread again

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    Default weekend commentary - time to check the TED Spread again

    (snip)"Credit Crisis Indicators: LIBOR Rises Again
    by CalculatedRisk on 11/14/2008 01:03:00 PM

    Once again, as economic activity dives off a cliff, here is another daily look at a few credit indicators ...

    LIBOR increased again, for the 2nd day in a row, after falling for 23 straight days:
    The London interbank offered rate, or Libor, for three-month dollar loans edged above 2.23% from just below 2.15% Thursday, the British Bankers Association reported.

    The three-month LIBOR was 2.15% yesterday and the rate peaked at 4.81875% on Oct. 10. (slightly worse)


    The yield on 3 month treasuries fell to 0.145% from 0.18%. (slightly worse).

    With the effective Fed Funds rate at 0.35% (as of yesterday), this is probably somewhat in the right range. At some point, I'd like to see the effective Fed funds rate close to the target rate (currently 1.0%) and the 3 month yield within 25 bps of the target rate.


    The TED spread: 2.09, up from 1.98 (slightly worse)

    The TED spread is back above 2.0 again, and still too high. The peak was 4.63 on Oct 10th. I'd like to see the spread move back down to 1.0 or lower. A normal spread is around 0.5. From reader Kai using data back to 1986: "The average TED spread is 58bps, but the median TED spread is 42bps and the non-crisis (i.e. less than 100bps spread) median is 37.8bps.""(snip)



    for any new DD readers

    (snip)"Understanding the TED spread

    One measure that is being used to summarize the strain in financial markets is the TED spread. This is calculated as the gap between 3-month LIBOR (an average of interest rates offered in the London interbank market for 3-month dollar-denominated loans) and the 3-month Treasury bill rate. The size of this gap presumably reflects some sort of risk or liquidity premium. I was interested to break the TED spread down into identifiable components to try to get a better understanding of what may be responsible for its recent behavior.

    The TED spread over the last 5 years is plotted below; for a longer time series see Bespoke Investment Group. Historically the spread typically stayed under 50 basis points. However, it's usually been above 100 basis points since the credit events of August 2007, and reached 300 several times during the last [ few - sic ] weeks.




    The concern being expressed by the author is that, despite the recent 'injection' of trillions of dollars worth of gov't money and gov't central bank credit into the world's financial systems, these efforts were only able to reduce the TED spread to a value which was still four times higher than the long term average. Additional concern being expressed is that, in the last two days, the decline in the TED Spread has ceased and reversed.


    In the simplest terms, this probably means that banks are still hoarding their cash in expectation of things getting even worse, businesses are now hoarding their cash in expectation of things getting even worse, rich individuals are hoarding cash in expectations of things getting even worse etc.

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    Default Re: weekend commentary - time to check the TED Spread again

    Gah more headaches This sort of thing makes doing business very tricky...
    Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor
    - Dr John Zoidberg

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    Default Re: weekend commentary - time to check the TED Spread again

    I guess one way to stimulate spending is to quickly induce hyperinflation. This will bring the end to cash hoarding!

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    Default Re: weekend commentary - time to check the TED Spread again

    ^^^ you are absolutely correct ... unfortunately !!!

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