TED offensive seems to have worked

A sign that some form of normality is turning back to credit markets. But it’s also stalling a bit..

What are we talking about? Well, the offensive to get interbank markets going again. The most watched indicator for success on this front is the so-called TED spread. What does it indicate? It’s the difference between:

  • Three month Treasury Bill interest rate (T-bill, hence the T)
  • Three month LIBOR (London Inter Bank Offered Rate; ticker ie ED, hence the ‘ED’ in TED spread)

The first are short-term government bonds which are generally seen as a safe haven investment (so in times of market stress demand for these goes up and their interest rates go down). The LIBOR, is an average of inter-bank deposit rates offered by member banks (in different currencies, but the three month’s US dollar LIBOR is of most interest).

So if the LIBOR goes higher, interbank lending gets more expensive, a sign of financial stress. And if the rate on 3 month treasuries goes lower, investors flight to safety, also a signal of financial stress, hence when the difference widens, that is, when the TED spread goes up, it’s a sign of financial stress.

First, the graph (you can follow it from Bloomberg):

You see that it has gone steeply up, especially after the bankruptcy of Lehman Brothers (perhaps the biggest policy blunder by the US authorities in handling the crisis), but after the Gordon Brown plan was adopted first in the UK, then in much of the rest of the EU, and then, reluctantly in parts in the US, the spread came back as fast as it had gone up.

But it’s stalling a bit lately. This could be that markets are waiting for the actual implementation of policy measures, many have only been announced.