TED Spread Continues to Fall

To a large degree, normalcy has returned to the credit markets.  The TED spread is ongoing proof of that. 

TED-Spread On Wednesday, this widely quoted credit risk indicator fell to a 26-month low.  The TED spread is now below its August 2007 levels. (August 2007 is generally viewed as the beginning of the subprime crisis.)

The TED spread is simply the difference between what banks and the U.S. Treasury pay to borrow money for three months.  People use it to gauge fear and liquidity constraints in the North American credit market.

The TED spread reached an all-time high of 4.65% at the height of the credit crisis in October 2008.  Its long-term average is about 1/2%.

  1. All the TED Spread (and 3 month Libor for that matter) prove is that the Banks are willing to lend to each other again now that Governments all over the world have jumped in to bail most of them out. It has not, however, made one iota of difference to the thousands of struggling Corporations who can’t get financing from these same Banks to save their lives. The few who are fortunate enough to get Bank financing for their current debt are being charged EXTORTIONATE rates as high as 11 or 12%. This in turn is exacerbating the financial difficulties these Companies face and causing increased worker layoffs and both Corporate and Personal bankruptcies. Until the Banks start acting like the grease for the wheels of the financial system that they should be, this World recession / depression will only get worse and many good Companies will fail putting thousands upon thousands of highly skilled workers on the scrap heap.

  2. Hi Marc: I believe it’s 0.20% in 2007.
    Hi Al: You touch on some of the reasons we used the phrase “To a large degree.” There’s still a lot of recovery ahead. Nonetheless, things have clearly improved considerably. Witness the high yield (junk) bond market where spreads have contracted over 1000 basis points since December! Or consider long-term retail lending spreads, which have fallen 200-300 basis points in the same timeframe. It will take a while for certain markets to function like they did pre-August 2007, but overall, there have been drastic improvements in the last 7 months.
    -rob

  3. That chart is crazy. I can’t believe that spike happened just 9 months ago.
    It does feel like things are coming back to normal a bit, but no one wants to admit it. Maybe people are just too cynical. Negative headlines stick with us a lot longer than positive ones.
    On the other hand maybe people are just scared of making an optimistic prediction and being wrong?
    R.T.

  4. Rob, thanks for your response. You are right, certain parts of the financial markets are working better now, noticeably the retail end of things. From a Business perspective, its still almost impossible getting bank financing on large amounts of debt but that seems to be because of this new reality that we’re in and the banks not willing to take on even reasonable risk. For an individual who doesnt currently own a mortgage, its probably a pretty darn good time to be looking at buying property for the long term with low rates out there, assuming one is in a relatively stable job. So much of the whole world’s economy is about perception and whether people believe its a good and / or safe time to invest whether in property or any other venture. Hopefully going forward things gradually improve for everyone. cheers. Al

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