Tuesday, November 04, 2008

Credit Crisis Indicators: More Progress

by Bill McBride on 11/04/2008 02:15:00 PM

  • As noted earlier, LIBOR declined again today, from Bloomberg:
    The three-month rate dropped 15 basis points to 2.71 percent, the lowest level since June 9, according to BBA figures.
    The rate peaked at 4.81875% on Oct. 10.

  • The yield on 3 month treasuries rose slightly to 0.47% from 0.44%. (unchanged)

    Usually the 3 month trades below the target Fed Funds rate by around 25 bps, so this is too low with the Fed funds rate at 1.0%. However, the effective Fed Funds rate is even lower (0.22% yesterday), so a 3 month yield of 0.47% is in the right range.

  • The TED spread: 2.23, down from 2.39 (Better) This is still too high, but significantly below the peak of 4.63 on Oct 10th.

    I'd like to see the spread move back down to 1.0 or lower - at least below 2.0.

  • The two year swap spread from Bloomberg: 116.52 down slightly (slightly better). This spread peaked at near 165 in early October, so there has been significant progress, but the spread seems stuck a narrow range now. I'd like to see this under 100.

  • Activity in the Treasury's Supplementary Financing Program (SFP). This is the Treasury program to raise cash for the Fed's liquidity initiatives. If this program slows down borrowing, I think that would be a good sign.

    Here is a list of SFP sales. No announcement today from the Treasury ... no progress.

    NOTE: Once a week I will include the Fed balance sheet assets. If this starts to decline that would be a postive sign.

  • The A2P2 spread is down to 4.45 from a record 4.72 a couple days ago. better.

    The Fed is buying higher quality commercial paper (CP) and this is pushing down the yield on this paper (0.97% on Friday!) - and increasing the spread between AA and A2/P2 CP. So this indicator is a little misleading right now. Still, if the credit crisis eases, I'd expect a significant decline in this spread.

    NOTE: This decline in the A2/P2 spread could be related to this WSJ article: U.S. Weighs Purchasing Stakes in More Firms
    The Treasury Department is considering using more of its $700 billion rescue fund to buy stakes in a broad range of financial companies, not just banks and insurers, after tentative signs of the program's success, according to people familiar with the matter.

    In focus are companies that provide financing to the broad economy, including bond insurers and specialty finance firms such as General Electric Co.'s GE Capital unit, CIT Group Inc. and others, these people said.
    The LIBOR is down, the TED spread is off again, the A2/P2 spread declined - so there is more progress.
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