The CERF Blog » TED Spread http://www.clucerf.org/blog Center for Economic Research and Forecasting Mon, 06 Feb 2012 17:06:38 +0000 http://wordpress.org/?v=2.9.2 en hourly 1 Bond Rates http://www.clucerf.org/blog/2010/04/07/bond-rates/ http://www.clucerf.org/blog/2010/04/07/bond-rates/#comments Wed, 07 Apr 2010 21:38:35 +0000 Dan Hamilton http://www.clucerf.org/blog/2010/04/07/bond-rates/ Corporate bond spreads are returning to normal levels. The first chart below shows that the monthly spread between Baa bonds and Aaa bonds are close to what they were back in 2007 before the 2008 crisis. This is good because the rate on Baa bonds is declining. This indicates that the perceived risk in lower quality bonds is falling.

However, not all spreads are back to normal. The second chart below shows daily normalized Ted spread, currently at 0.64, is still not very close to the long-run average of 0.12. The normalized Ted is the Ted divided into the 3-month United States Treasury rate. We do this because a Ted spread of 0.25 is a very different thing when the 3-month rate is 0.20 compared to when it is 0.40. The normalized Ted reached 200 in the depths of the crises. It rose again early this year, reaching a level just over 5, when the prospect of Greece defaulting became publicized. Everything is relative and this is a particularly good example. It is good that this measure is 0.64 rather than 5 or 200, and it is declining. Again, this indicates that the perceived risk of non-Treasury bonds is falling.

As with diverse indications from various measures of real economic activity, various fixed-income indicators are showing that certain aspects of financial markets are returning to normal which is a welcome sign indeed.

]]> http://www.clucerf.org/blog/2010/04/07/bond-rates/feed/ 0 What is the Ted Spread Telling Us? http://www.clucerf.org/blog/2009/08/19/74/ http://www.clucerf.org/blog/2009/08/19/74/#comments Wed, 19 Aug 2009 21:42:10 +0000 Bill Watkins http://www.clucerf.org/blog/2009/08/19/74/ This is a slow week for economic news. I was thinking about how different things are from last August. Last year we were approaching the most serious economic crisis of our life. Economic storm clouds were building, the government was bailing out firms, and everyone was preparing for the worst. Except, September was worse than any imagined.

Today, things seem to be much better. Some economists have declared the recession over. Policy makers and talking heads seem to have adopted a complacent attitude. They are confident the worst is over. Sentiment surveys aren’t quite so sanguine. Maybe this time the political class is wrong.

I reviewed the 3-month TED spreads (Libor-Treasury—usually interpreted as a short-term risk premium), and sure enough they are down a bunch from a year ago. However, a 50 basis point spread is quite different when the 3-month Treasury is 18 basis points versus when it is 200 basis points. So, we normalized the TED spread by the Treasury rate to provide a measure that is consistent across interest rates. This tells us a very different story. That spread in July, the most recent month for which we have data, was higher, on average, than even in September 2008.

Combine the normalized TED spread with data on bank lending, consumer and business borrowing and bank charge offs, you might start thinking that things are not looking all that good.

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