On Friday, the Wall Street Journal officially ran an obituary for the TED spread proclaiming: ‘The Ted Spread Is Dead, Baby. The Ted Spread Is Dead.’ The article explains:
This spread charts the difference between the London interbank offered rate and the yield on three-month U. S. Treasury bills. Libor is a dollar-denominated global gauge of private-sector credit strength, particularly that of banks, and three-month bills measure an ultrasafe bet – the U. S. government’s creditworthiness. Ted stands for Treasury-Eurodollar rate, the Eurodollar being the greenback denominated lending reflected in the Libor rate.
For the past year and a half the spread has been creeping higher, rising from 0.2 of a percentage point at the turn of 2015, to 0.653 of a percentage point on Wednesday. That is the highest it has been since May 2009, in the aftermath of the global financial crisis, surpassing other moments of extreme stress, like the euro sovereign-debt crisis around 2011.
But there is a problem with that. Looming U. S. regulation of money-market funds has driven Libor higher, meaning that it isn’t quite the indicator that it once was.
This post was published at Wall Street Examiner by Jesse Felder ‘ September 26, 2016.