Fixed Income Recap

Investors fled the safety trade today as stocks rallied hard. The two-year finished down 7/64, and the ten-year was lower by 53/64. The benchmark curve steepened by 4 basis points, and currently sits at +232 bps. A basis point represents .01%.

The Fed purchased $3.18 billion in longer dated Treasuries with maturities from 8/15/19 to 2/15/26. Cumulative Fed purchases stand at $107.89 billion, still a ways from their target of $300 billion that is scheduled to finish in September.

TED Spread Continues to Fall

The spread between 3-month T-bills and 3-month Libor, dubbed the TED Spread, is widely used to measure credit market functionality. 3M Libor is the rate used by banks to lend each other money for a three month period, so unlike Treasuries, Libor lenders are exposed to default risk. When credit tightens and banks become less willing to take the risk involved in lending to each other, they move to T-bills to avoid the default risk and still maintain liquidity. As a result Libor rises and the yield on T-bills falls, widening the TED Spread. This is what happened in September and October of last year.

Three Month Libor has fallen every session since March 27th, including a 4.1 basis point decline today, bringing the TED Spread to its lowest level since August 2007.

However, on a relative basis, one would thing TED has a ways to go. For example, on August 8th 2007, the last time the TED Spread was this low, 3-month T-bills were at 4.95%. This indicates that although the TED Spread has come in from the extremely wide levels of last fall, it remains high on a relative basis. The current relative spread, which compares the nominal spread to the current rate environment, is still elevated at 389.2%, compared to just 8.7% in 2007.

Have a great evening.

Cliff J. Reynolds Jr., Junior Analyst