When it comes to credit spreads, write off the first half of June.
From June 1 through June 14, the TED spread, which measures the difference between three-month Treasurys and the three-month Libor rate, shot up 24.64% to 48.64. This led me to wonder whether we were in a mini credit crisis; looking back, I think we were.
But spreads have improved since that June 14 peak. The TED fell to 43.09 yesterday, and is hovering between 41 and 42 today.
Historically, though, the TED is on the high side. The Libor-OIS spread, which calculates the difference between the three-month Libor rate and the anticipated average of the federal funds rate, has exhibited flatter — although not better — performance. Libor-OIS is at around 33 today, and has been stuck in the low 30s all month. This compares to most of 2010, when the Libor-OIS was steadfastly below 12, and dropped as low as 5.96 on March 13.
The turmoil in Europe has played a part. So too has the drop in government cash on the capital markets. I anticipate spreads bumping around for the remainder of the summer, in part because Europe, being essentially shut for the summer, won’t definitively resolve its economic challenges.
LIBOR-OIS SPREAD
TED SPREAD