If you look hard, you can find signs that credit costs are climbing. But just barely.
Both the TED spread and the Libor-OIS spread have widened in the last month. In particular, the TED, which measures the difference between three-month Treasurys and the three-month Libor rate, has seen a bump since mid January, climbing 16.28% to 17.2034 at the close yesterday. However, that’s a far cry from the peak of 20.2337 on Dec. 17, 2010. In other words, the TED is on a bumpy, if moderate, ride.
TED SPREAD
The Libor-OIS spread, which calculates the difference between the three-month Libor rate and the anticipated average of the federal funds rate, closed yesterday at 15 basis points, which is 24.7% higher since the start of 2011. But the Libor-OIS hasn’t been weathering the spikes of the TED. Rather, the spread has climbed only steadily since QE2 went into effect toward the end of last November. At 15, the Libor-OIS remains historically cheap.
LIBOR-OIS SPREAD
It seems fair to say that the TED and Libor-OIS would have spiked more had not the Federal Reserve injected capital into the nation’s monetary system in the effort known as QE2. What would transpire if Ben Bernanke changes his mind about keeping capital costs dirt cheap? Who knows, but better to get that loan now, as opposed to waiting to find about.