SPREAD ‘EM: Collars Loosen Around Lenders’ Necks

It was getting a bit uncomfortable there for a while, and that is not just because of the blistering summertime heat on Wall Street.

Credit spreads had started to work their way higher as uncertainty in Europe and the global economy began eroding investor confidence. The tide seems to have turned, however.

The truth is spreads have taken a bumpy ride in 2011. Credit spreads were at their lowest at the beginning of the year, as the cost of capital came down noticeably from 2010 prices. Since then, spreads have worked their way higher, with the TED spread peaking at 26.19 on May 6 from 18.31 on Jan. 3, the first day of trading of the year. The TED measures the difference between three-month Treasurys and the three-month Libor rate. By late May, the spread began to ease, but mid-June brought higher capital costs again. The summertime peak was on July 5 at 25.08. 

The markets are off that peak now. Today, the market is turning in a beer-worthy decline of 13.6% in the TED to 19.16, as of 9:44 a.m. ET.

TED SPREAD

The Libor-OIS spread is also showing positive signs for lenders, although not like the TED. The Libor-OIS spread, which calculates the difference between the three-month Libor rate and the anticipated average of the federal funds rate, which means the TED is also indicating that US fixed-income markets are finding more investor support than its European counterparts.

LIBOR-OIS SPREAD

Still, both core spreads indicate falling capital costs for lenders. As has been the pattern since the height of the credit crisis, lower capital costs might not spell economic recovery, but they have staved off economic disaster brilliantly.