TED Spread Nears Normal

TED spread” became a buzz-phrase last fall when the media quoted it daily as a gauge of the credit crisis.

The TED spread is the difference between what banks and the U.S. Treasury pay to borrow money for three months.  It’s a general measure of fear and liquidity constraints in the North American credit market.

After reaching historic highs in October, the TED spread (see Bloomberg and the chart below) is now almost back to “normal.” In fact, it’s back to where it was before the credit crisis began in August 2007.

TED-Spread

(The above chart illustrates data through the end of 2008.)

Three-month Libor-OIS spreads (another interbank lending metric) are also vastly improved.

From a Canadian borrower’s perspective, this is noteworthy. It suggests lenders are paying less of a risk premium to finance certain mortgages.  That, in turn, is slowly reducing pressure on mortgage rates.

This could also foreshadow a positive effect on variable-rate mortgage spreads, which are linked to the short-term money market.  Instead of prime + 0.60% to prime + 0.80% today, lenders may start slowly reducing this premium—assuming there are no more economic disasters. 

If this all plays out, it’s all the more reason not to lock into a rate like prime + 0.75% today.

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