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| Short Term Credit Rates (May 15, 2009) Interbank lending rates continue to narrow. The cost of borrowing in dollars continues to fall. The worlds most widely used benchmark rate for short-term interest rates for the most preferred borrowers in the world, the 3-Month Libor narrowed to .83, a 52-week low. It is well below its rate of 2.81% the day Lehman filed for bankruptcy and was as high as 4.81% last October. This is the benchmark rate for $360 trillion of financial products worldwide. The Ted Spread which is the difference between what the government and companies pay for three-month loans and used as an indicator of credit risk among corporate borrowers narrowed to .67%. A a new 52-week low and below its 2.01% on 9/15/08. We need that to continue to fall in 2009. As this spread narrows, default risk is considered to be decreasing, and traders and investors will move off the sidelines of safer investments such as US treasuries and buy back into the market. The difference in yield between the 10-year TIPS and the benchmark 10-Year Treasury-Bond yield serves as an alternative for the market's implicit forecast for inflation for the next 10 years. That rate is about 1.53%. The TIPS Yield should equal the yield of the Treasury bond on the same maturity minus the current core CPI rate (1.9%). However, the actual yield on the TIPS does not always equal the calculated yield. The difference is referred to as the TIPS spread, which many policymakers look at as a measure of projected inflation. That real rate is about 1.61% right now. When the spread between the yields increases investors expect faster inflation. The Libor-OIS spread has narrowed to .63%, and below its rate of 1.05% when Lehman filed for bankruptcy. This is a gauge for cash and when it increases it reflects that banks that are lending to other banks believe they now have a higher risk of defaulting on the loans. They will then increase the interest rate they are charging to offset this risk. It also tells us that the credit markets are not functioning smoothly. Back in June Greenspan stated that this spread serves as a measure for determining when markets have returned to normal (25 bps). It averaged 11 bps in the five years before this recent financial crisis. |
| Short Term Credit Rates (April 29, 2009) The cost of borrowing in dollars has fallen. The worlds most widely used benchmark rate for short-term interest rates for the most preferred borrowers in the world, the 3-Month Libor narrowed to 1.03. It is well below its rate of 2.81% the day Lehman filed for bankruptcy and was as high as 4.81% last October. This is the benchmark rate for $360 trillion of financial products worldwide. The Ted Spread which is the difference between what the government and companies pay for three-month loans and used as an indicator of credit risk among corporate borrowers narrowed to .94%. Not a new 52-week low of .75%, but below its 2.01% on 9/15/08. We need that to continue to fall in 2009. As this spread narrows, default risk is considered to be decreasing, and traders and investors will move off the sidelines of safer investments such as US treasuries and buy back into the market. The difference in yield between the 10-year TIPS and the benchmark 10-Year Treasury-Bond yield serves as an alternative for the market's implicit forecast for inflation for the next 10 years. That rate is about 1.54%. The TIPS Yield should equal the yield of the Treasury bond on the same maturity minus the current core CPI rate (1.8%). However, the actual yield on the TIPS does not always equal the calculated yield. The difference is referred to as the TIPS spread, which many policymakers look at as a measure of projected inflation. That real rate is about 1.55% right now. When the spread between the yields decreases investors expect slower inflation. The Libor-OIS spread has narrowed to .83%, and below its rate of 1.05% when Lehman filed for bankruptcy. This is a gauge for cash and when it increases it reflects that banks that are lending to other banks believe they now have a higher risk of defaulting on the loans. They will then increase the interest rate they are charging to offset this risk. It also tells us that the credit markets are not functioning smoothly. Back in June Greenspan stated that this spread serves as a measure for determining when markets have returned to normal (25 bps). It averaged 11 bps in the five years before this recent financial crisis. |
| Short Term Credit Rates (March 14, 2009) The cost of borrowing in dollars is rising. The worlds most widely used benchmark rate for short-term interest rates for the most preferred borrowers in the world, the 3-Month Libor widened to 1.32% up from 1.08% in mid-January. It is well below its rate of 2.81% the day Lehman filed for bankruptcy and was as high as 4.81% last October. This is the benchmark rate for $360 trillion of financial products worldwide. The Ted Spread which is the difference between what the government and companies pay for three-month loans and used as an indicator of credit risk among corporate borrowers widened to 1.13%. Not a new 52-week low of .75%, but below its 2.01% on 9/15/08. We need that to continue to fall in 2009. As this spread decreases, default risk is considered to be decreasing, and traders and investors will move off the sidelines of safer investments such as US treasuries and back into the market. The difference in yield between the 10-year TIPS and the benchmark 10-Year Treasury-Bond yield serves as an alternative for the market's implicit forecast for inflation for the next 10 years. That rate is about 1.07%. The TIPS Yield should equal the yield of the Treasury bond on the same maturity minus the current core CPI rate (1.7%). However, the actual yield on the TIPS does not always equal the calculated yield. The difference is referred to as the TIPS spread, which many policymakers look at as a measure of projected inflation. That real rate is about 1.19% right now. When the spread between the yields increases investors expect faster inflation. The Libor-OIS spread has widened to 1.08%, and now above its rate of 1.05% when Lehman filed for bankruptcy. This is a gauge for cash and when it increases it reflects that banks that are lending to other banks believe they now have a higher risk of defaulting on the loans. They will then increase the interest rate they are charging to offset this risk. It also tells us that the credit markets are not functioning smoothly. Back in June Greenspan stated that this spread serves as a measure for determining when markets have returned to normal. It averaged 11 bps in the five years before this recent financial crisis. |
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