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Ted spread says credit crisis dead Print E-mail
Friday, 24 July 2009

by John Goff

Finance chiefs, buck up: a whole lot of signs out there right now seem to indicate that the capital crisis may finally be letting up.

I know, you've heard this one before. But really, look at what's going on. For starters, corporate debt issuance has skyrocketed of late—at least compared to where it's been for a while. Non-investment grade bonds are trading way up from way the were at the beginning of the year. And interest rates on those speculative issues have gone way down.

Thus, junk bond issuers—businesses in bad straits, generally—have been able to borrow money at less-then-usurious rates.Such a development seems to show that lenders are no longer freakin' freaked-out by the possibility of widespread bankruptcies—not even widespread bankruptcies in the shabbier neighborhoods of junk bond issuers.

"There was pricing of tremendous systemic risk in the marketplace at the beginning of the year," Cam Albright, managing director of fixed income for Wilmington Trust's Investment Management, told Reuters. "A lot of that has been taken out of the market and that risk has also come down dramatically."

But perhaps the surest sign that the credit crisis has just about run its course is the ever-dwindling Ted spread (see chart above, courtesy of Bloomberg). The Ted spread, for those of you who have limited hard drive space—and I include myself in that group—is the difference between interest rates on 3-month Treasuries and three-month futures contracts on Euro dollars (represented by Libor).

In essence, a wide Ted spread indicates a lack of confidence in counteparty risk. A narrower one tends to indicate concerns about credit risk, since liquidity is being taken out of the system. Put it this way, it's not a good thing.

The point is, back on October 10, 2008, back when the financial contagion was reaching epidemic proportions, the Ted spread hit a record high of 465 basis points. As of yesterday, the spread was 0.3 percent.

"The traditional barometers do register significant improvement from where they were six-to-12 months ago," William Sullivan, chief economist at JVB Financial Group, told Reutuers. "The most obvious one is Libor rates: you have seen a substantial decline."Of course, it could take time before the job market improves. The same can be said for the housing market, although the news today showed that home prices are starting to rebound.

The housing sector won't really pick up until banks start offering mortgages again.

Still, given what's happened over the past few years, cautious mortgage lending may not be such a bad thing. And until then, finance chiefs may just find it easier to line up a loan or two.

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