Thursday, September 15, 2011

TED Spread: Seems Like Old Times

Because I am not a debt guy but an equity guy, I spent little or no time monitoring the condition of the credit market until the middle of September 2008.

Due to the credit-market freeze that became apparent even to the likes of me at that time, however, I have been tracking its condition on a daily basis since then.

My primary metric for doing so is the TED spread, which is the difference between the three-month U.S. Treasury-bill interest rate and the three-month London interbank offered rate (LIBOR). The acronym is a historical artifact derived from T-bill and ED, the ticker symbol for the Eurodollar futures contract formerly employed in the place now occupied by the LIBOR.

Although I personally am content with the TED spread, Matt Phillips of The Wall Street Journal covered a handful of other helpful credit-market metrics in his "Credit Stress Gauges: Just How Bad is It Out There?" when the credit market experienced a period of distress last year.

Based on my interpretation of Bloomberg.com's TED spread charts, the closing spread has more than doubled in less than seven weeks, as it has risen to about 0.35% (or 34.91 basis points) yesterday from about 0.16% (or 16.40 bps) on July 29.

By way of background, the closing spread spiked to its all-time high of about 4.64% (or 463.62 bps) on Oct. 10, 2008. Therefore, the credit crunch now does not appear to be in the same league as the credit crunch then. Yet.

However, the European Central Bank's (ECB's) announcement today that it will conduct three U.S.-dollar liquidity-providing operations by the end of the year -- in coordination with the Federal Reserve, Bank of England, Bank of Japan, and Swiss National Bank -- indicates to me credit conditions could get worse before they get better.

In one plausible scenario, the ECB's operations could serve as coping mechanisms for financial institutions that are affected by the widely assumed coming default on debt issued by the government of Greece.

As a financial-market wag once observed, the credit market is anything but LIBORing.