Thursday, December 10, 2009

2009 Christmas Card from the U.S. Credit Market



The TED spread is the difference between the three-month LIBOR rate (includes a credit risk premium) and the three-month risk-free Treasury bill rate, and is considered to be a good indicator of the overall amount of perceived credit risk in the economy. On September 15, 2008 the TED Spread jumped by 65.5 basis points (from 134.85 bps to 200.35 bps) as Lehman Brothers filed for bankruptcy and fears about credit risk soared. Two days later on September 17 as fears about credit and financial risk intensified, the TED Spread jumped by another 82.6 basis points (bps) to more than 300 bps, setting a new record (back to at least 1990) for the largest one-day increase in the TED spread (that record still stands), and setting a new record for the highest TED Spread to date.

At the height of the financial crisis a month later, the TED Spread hit 456.485 basis points on October 13, 2008, an all-time, unprecedented record.  As the credit and financial markets have gradually healed over the last year, the TED Spread has fallen by more than 400 bps to the current level of about 25 bps, the same level that existed before the financial crisis (see chart above).  This is one more sign that the recession has ended, and another reason to celebrate this year's holiday cheer from the credit markets.  

9 Comments:

At 12/10/2009 8:52 PM, Anonymous Pingry said...

"another reason to celebrate this year's holiday cheer from the credit markets."

Not so fast Mark.

This year's holiday cheer is not from the credit markets, but from the Federal Reserve.

Had they sat by idly as the financial system malfunctioned, then TED Spreads would still be just as high, perhaps even higher as the economy and unemployment would have rivaled the pain and suffering of the Great Depression.

--Pingry

 
At 12/10/2009 10:14 PM, Anonymous Icadi said...

How cute!

 
At 12/11/2009 1:49 AM, Blogger Gherald L said...

If it went to 456.485 on 13 October, why does the chart not show anything above 325?

 
At 12/11/2009 7:26 AM, Blogger Mark J. Perry said...

Gherald: Sorry, my original chart was made using monthly TED spread data (averaged from daily), and I have now replaced it with a new chart with daily data.

 
At 12/11/2009 9:06 AM, Anonymous Lyle said...

Great chart, it demonstrates that what happened was a panic. Last Sept 30 I went to the bank and they were out of $100 bills, shades of 1932-33. It now seems that at that time as in the prior time the mattress had become the ideal investment vehicle. Panic leads to distrust and paranoia you don't know who will fall next so you freeze.

If you read Lords of Finance you see that a lot of lessons were learned from the 1931-1932 period when it became the great depression, from the earlier recession. (1931 started the banks failing in the world, and the snowball rolled downhill until march 4 1933 in the US. ) During that period credit contracted about 40% and a good percent of bank deposits went into the mattress or other hiding places.

 
At 12/11/2009 9:10 AM, Blogger Methinks said...

Just as a reminder - the TED spread was low as the bubble inflated as well. And right before it burst. Do you really think the risk is not risky once again? Are banks really less fragile than they were a year ago?

 
At 12/11/2009 9:20 AM, Blogger Methinks said...

On the other hand, banks are government entities now, so their credit worthiness should be about the same as the US government's. I'm sure there will be no unintended consequences or anything.

 
At 12/11/2009 10:17 AM, Anonymous gettingrational said...

Two years ago I increased my credit line and the terms changed. The interest rate is now aligned with the LIBOR instead of being fixed. I was nervous at first but its really rediculously low right now. Stay low TED spread.

 
At 12/11/2009 12:51 PM, Anonymous Benny "Tell It LIke It Is Man" Cole said...

Die, recession, die, die, die!
I think that we are heading into another global boom, maybe the best ever.
Why? Gobs of investment capital, generated in Asia and Europe, and even the USA. Capital will be cheap for generations.
This will lead to many busts, and a tough investor climate. It is hard to make money when asset prices are high. Lots of competition for assets.
But economically, it will be great.
The USA will probably lag the Asian-led boom. We are burdened by a parasitic military-industrial complex, a heavily socialized and subsidized rural economy, and the usual regulation-itis and lawyers.
But still, I think our economy can grow for the next couple decades, pulled along by Asia.

It may be that investors "get tough" in next couple decades. There will be many busts, but investors will seize busts as buying opportunties--which they are.

 

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