SPREAD ‘EM: Credit Prices Officially Leave Crisis Behind

When the financial crisis hit about a year ago, credit costs rocketed higher seemingly overnight. Structured products that had fluctuated for years in a narrow band of single-digit basis points suddenly widened to hundreds of basis points in days, if not hours.

The retreat from these levels of financial shock has been anything but overnight. Slowly, slowly credit spreads have tightened over the last several months. First, the TED spread, which measures the difference between three-month Treasurys and the three-month Libor rate, dropped below 200 last October. By Jan 2009, the TED fell below 100. In May, the 80 mark fell.

Mark your calendars because another important threshold has been crossed: 30. Officially, the 30 barrier was crossed on Aug. 4, and the TED remains below that level today, at 28.88. Not since March 12, 2007, has the TED been this narrow. The TED peaked at 463 on Oct. 10, 2008.

The Libor-OIS spread, which measures the difference between the three-month Libor rate and the anticipated average of the federal funds rate, has also fallen below 30. The spread is now at 26 basis points. The Libor-OIS fell below 30 on July 28.

Like the TED, the current Libor-OIS spread has not been this narrow since before the credit crisis. On Aug. 8, 2007, the Libor-OIS was at 13.4. The next day it shot up to 39.95. But that was a long time ago.