Keep Your Eye on the Credit Markets' Ball - Revisited
Back on October 7th, I referenced the TED spread and its importance in measuring the twin forces pressuring the financial markets - banks capacity and willingness to lend and the degree of investor fear. Both are captured in the TED spread (3 month LIBOR - 3 month US Treasury rate) and together they serve as an excellent metric for measuring the progress toward alleviating the credit crisis.
As the first chart shows, since the October 7 posting substantial progress has been made as the TED spread has declined significantly. However, as the accompanying second chart and the table shows, the decline has been centered exclusively in a decline in LIBOR (second chart) while the 3 month US Treasury rate has hit under the mattress yield levels.
Investment Strategy Implications
One aspect of a return to normalcy has begun with the descent in LIBOR. However, the much anticipated "mother of all bear market rallies" still waits in the wings as the fear factor (in the form of effectively zero percent interest rates) remains elevated.
Over the past few weeks, brave investors have bid up stocks in anticipation of a partial stampede from $3.5 trillion sitting in money markets with the tipping point being reflected in a rise in the 3 month Treasury rate. Keeping our investment eye on the credit markets' ball remains the watchword for financial assets.
1 comment:
"Brave investors" have seen those trillions in money markets all year long, and have recognized why they are there, not being put to work in the market. This reason lives on, while confidence only wanes.
As such, we could be poised to suffer an insidious psychological trick, finding this or that precedent suggesting this is an "opportunity of a lifetime," serving to blind us from the fact we are, in fact, bankrupt.
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