Monday, October 20, 2008

Credit Markets Thawing?

It appears so.  The TED Spread is now under 3, still quite high (in a healthy market it would be around 1), but much lower than the 4+ we were seeing in the height of the panic.  Also, the yield on 3 month treasuries (part of the TED) is up above 1 after plunging to 0.02 on September 17th and hovering around 0.2 recently.  

What do these mean?  Well the yield on T-Bills rising means that demand for them has softened suggesting that not all potential lenders are preferring to huddle around the safe warmth of Treasuries.  The TED Spread is going down because of this and because the LIBOR is also coming down meaning the supply of funds being made available for bank to bank lending is rising.  Remember that the LIBOR is a measure of the rate banks charge each other when they lend to each other. The TED Spread is the difference between the LIBOR and the rate on Treasuries and its being high means that all bank's extra cash is being put into Treasuries and not lent to other banks.  

This is good news and suggests that the efforts of the Fed, the other European central banks and the Treasury are finally showing some traction.  This will not correct the recession, but is a fundamental first step on the road to recovery.