TED Spread- Don’t Say I didn’t tell you….

Update: Well here we go again we are well past the 3% mark, the TEDs currently at 3.13%, well I see it zooming past further too.
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Well just yesterday I mentioned that we could see the TED spread shoot past its peak of 1987.


http://ecobizindia.blogspot.com/2008/09/ted-spreaad-again.html


So here we are today the Ted spreads at a hefty 2.99%, the highest figure since we have data.

The Great Depression II is truly here; trust is at all time lows, the market will punish even fair performers for all the trust is lost. Additionally there’s no easy way out of this, de-leveraging is going to be a long and painful process. We are sure to see the pain well into 2010 may be even more.

For all those looking for an investment opportunity, hit the Gold. It’s your best bet against a falling US currency and depletion of purchasing power. In fact it’s the only hedge. By the way gold’s rallied a 11% in the last trading session, I see more of it, much more.

The way I see it, Gold will shoot past the $1000 barrier soon enough and the next target thereon is $1200, which I see it shoot past in the next 3-4 weeks.

-Puneet Gulwani

Ecobiz on Reuters

Another one
http://www.reuters.com/article/blogBurst/investing?bbPostId=B922Cq4UnKrkCz9siTVg4bYgjCz8HBAkPcQx0pCzCV1XIMbTWjx

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http://www.reuters.com/article/blogBurst/investing?bbPostId=B922Cq4UnKrkCz9siTVg4bYgjBzAwV47RGKNoBCbPW2wnTtuf

Total Views: 429

The TED Spread Again

Update 17th Sept, 2008: TED Spread shoots further, zooms to 2.17%... this is the highest in the current crisis.... just a tad lower than Oct, 1987.... we could see it shoot past there in the next couple of days
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Update 16th Sept, 2008: TED Spread now shoots upto 1.82%
T-Bill 3 M: 1%
LIBOR US 3M: 2.82%

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Well here we go again. It's fairly evident now that the FED and the US government doesn’t have any further appetite for bailouts!!!.... With Lehman filing for bankruptcy and Merrill being sold clubbed with 'No More Bailouts' the TED spread today shot up to 136 basis points.... higher than the previous months figure.... need I say this is what was expected....

Well it looks like it's going to shoot up further additionally it’s is expected to stay above the 110 basis points mark till at least March'08...

(PS the previous post was drafted much before it was posted….. the post timing however was coincidental with the hara-kiri on Wall Street.)

Liquidity, inter-bank trust and the Ted Spread

The Ted spread is the difference between the 3 month T-Bill and the LIBOR rate. While the T-Billis a completely government backed bill, the LIBOR rate factors for the inter-bank risk. The Ted spread can be used as an indicator of credit risk. This is because U.S. T-bills are considered risk free while the rate associated with the LIBOR futures is thought to reflect the credit risk of banks. As the Ted spread increases, default risk is considered to be increasing, and banks will have a preference for safe investments. As the spread decreases, the default risk is considered to be decreasing.

Now lets just take a peak into what’s happened with respect to the Ted spread since January, 1987.

The highest spread was witnessed in Oct,1987. Surprisingly this was in the midst of another mortgage crisis. Mortgages on the wall street have been since the 1990’s the single highest traded securities. From 1990 the average Ted spread till march of 2007 was 0.50. It was only after analysts were hinting at the sub-prime and the crisis broke out did the Ted spread rise to over the 100 bps figure, it touched 1.98% in December, 2007. From 1997-1990 the spread was at an average figure of 129 bps, this when the crisis was a far cry from the sub-prime crisis of 2007. The gravity of this crisis has already been witnessed with Meryll writing down up to 88% of their CMOs and ADB writing of 90%. So, the question that arises here is are we assuming its over so soon? Or are we overly relying on the Fed? Or do we actually believe that banks have spun out of this crisis in a jiffy (6 months)?

Well honestly, I think not. The Ted spread still indicates that we are well in the midst of the crisis. In July,08 the spread shot 26 bps to touch 1.16%. Believe me it’s bankers who know best about the real situation that they are facing and thus will price the risk most accurately, and I believe that that is what they are doing. The Ted spread for the past one year since August,07 to July,08 has been at an average of 133 basis points. And, the spread is too high for us to believe that it’s all over.

The clear indicator that the crisis, in terms of write-offs, trust, and liquidity will be truly over only when the spread is less than 60 bps at least for an entire quarter. And obviously what we are seeing now is a clear indicator that a good proportions of the write-offs are still to come.

- Puneet Gulwani