The Ted Spread - From 0.4 Up To 4.6 And Down Finally To < 1 - What Does It Mean? We Were F*&ked [View All]

We were staring into Great Depression II. Now, things are still bad, but not quite Great Depression II.

What does it all mean? Here is Paul Krugman discussing the significance of the Ted Spread back in April 2008. Of course, after Krugman posted this, a few months later, credit markets really went all to hell as the graph below shows.

http://krugman.blogs.nytimes.com/2008/04/17/its-my-ted-mine/

/snip

Seriously (very, very wonkish), I started looking at the TED spread last fall, out of frustration with news reports that compared 3-month LIBOR with the Fed funds rate; it seemed obvious to me that those comparisons were understating the true spread, because the Fed funds rate is daily and LIBOR was, at minimum, taking into account expected future Fed funds cuts.

I got to ask Fed officials about that, and was told that they preferred the OIS spread, based on Fed funds futures prices. They didn’t like the Ted spread, they said, because they thought liquidity issues distorted Treasury rates.

But I gradually became convinced that those liquidity issues were actually at the heart of the story. Basically, even Fed funds suffers from fear of bank defaults: it’s an unsecured loan, just like LIBOR. So the comparison between 3-month Treasuries and LIBOR is telling you how much of an interest rate loss investors are willing to accept in return for something that’s really, truly safe.*

So I’ve focused on the TED spread for a while, and I think other people have picked it up from me.

/snip

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So, where do things stand today? We are at 096, which ain't great, but it is 4.33, which meant no one was lending squat to anyone. It really did mean what President Obama the candidate was talking about during the campaign, and now, that the economy grinds to a halt. Things areb't great now, but in that fourth quater of 2008 under George Bush, the credit markets pretty much came to a stand still.

http://www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP%3AIND