Treasuries spent the entire day lower for several reasons, mostly continued rate locking ahead of some large corporate issuance to come and concerns about the sustainability of China’s demand for Treasuries. There was no economic data yesterday and volume remained light for both OTC and exchange markets despite the official vacation season being over.
Lehman filed for bankruptcy one year ago today, so I thought it would be fitting to show a quick snapshot of how far we have come from the panic that followed.
The Ted spread is the difference between 3-month LIBOR and 3-month Treasury Bills. Both are short term rates but they represent two very different markets. LIBOR is a market determined rate that represents what banks overseas charge each other for dollar denominated loans. As credit conditions worsen, banks are less willing to extend credit to other banks. However, during trying times investors flood to the security of short US Treasury debt, driving rates on those instruments down.
The spread between the two represents both bank’s willingness to extend short term credit to other banks and investors willingness to accept low yields in exchange for the safety of T-bills. As you can see from the graph, this spread rocketed higher as the Lehman default spread throughout the credit markets.
More impressive perhaps is the recovery that we have had since mid October. The TED spread finished yesterday at 16.01 basis points and is lower again today. Massive amounts of liquidity being pumped into the system by central banks across the world is the main reason the TED spread has improved as much and as quickly as it has. As long as the access liquidity exists numbers these will continue to improve as money will instinctively search for better yields, and exit strategies from the FED, BOE, ECB and others will test this recovery, regardless of how far they are from tightening monetary policy.
Cheers to the next Bubble!
Cliff J. Reynolds Jr., Investment Analyst
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