Thursday, September 25, 2008

Credit Spreads: Off the Charts

by Bill McBride on 9/25/2008 10:47:00 AM

We've been tracking the TED spread as a measure of distress in the credit markets (the difference between the LIBOR interest rate and the three month T-bill). Usually the TED spread is less than 0.5%. The higher the spread, the greater the perceived credit risks (compared to "risk free" treasuries).

The TED spread has increased to 3.27% this morning. Completely off the charts! Here is the TED Spread from Bloomberg.

And the following graph is the A2/P2 spread from the Fed's commercial paper report. The A2/P2 Spread hit 409bp yesterday. This is literally off the chart compared to any previous period.

When the A2/P2 spread spiked to 160 last year that was considered shocking; now that spike looks minor.

A2P2 Spread Click on graph for larger image in new window.

This is the spread between high and low quality 30 day nonfinancial commercial paper.

What is commercial paper (CP)? This is short term paper - less than 9 months, but usually much shorter duration like 30 days - that is issued by companies to finance short term needs. Many companies issue CP, and for many of these companies the risk of default is close to zero. This is the high quality CP. Lower rated companies also issue CP and this is the A2/P2 rating.

Usually the spread between the A2/P2 and AA paper shows the concern of default for the A2/P2 paper. But right now this shows the credit markets are essentially locked up waiting for The Mother of All Bailouts.