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Monday, October 13, 2008

Credit Crisis: Watching for Signs of Progress

by Calculated Risk on 10/13/2008 09:30:00 AM

Here are a few indicators I'm watching for progress on the credit crisis.

  • The yield on 3 month treasuries. (note: bond markets are closed for Columbus Day).

    Three Month Treasury Yield
    Click on graph for larger image in new window.

    This graph shows the high, low, and the close for the three month treasury bill since the beginning of the year.

    A good sign would be if the daily volatility subsides, and the yield moves up closer to the Fed funds rate, or about 1.25%.

  • The TED spread. The TED spread hit a recent high of 4.64 on Friday. This is far above the highs reached during the previous waves of the credit crisis.

    Any significant decline would suggest progress, and a decline below 1.0 would indicate this wave of the crisis is over.

    Edit: From Econbrowser:
    One measure that is being used to summarize the strain in financial markets is the TED spread. This is calculated as the gap between 3-month LIBOR (an average of interest rates offered in the London interbank market for 3-month dollar-denominated loans) and the 3-month Treasury bill rate.
    Usually the TED spread is less than 0.5%. The higher the spread, the greater the perceived credit risks (compared to "risk free" treasuries).

  • 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.

  • The A2P2 spread.

    A2P2 Spread This is the spread between high and low quality 30 day nonfinancial commercial paper.

    During a recession, this spread usually increases because the risk of default for lower quality paper increases. However the recent values (over 400 bps) are far in excess of normal. If the credit crisis eases, I'd expect a significant decline in this spread.

  • Industry contacts. I'm tracking some financing deals there are being held up right now. If these deals complete that would be a good sign (I'll post something when this happens).

  • The spread between the 2-year interest rate swap and the 2-year Treasury (recommended by bond guy)

    Two year spread swap and treasury
    In the comments, bond guy writes:
    The T-Bill rates will probably take time to settle down. This means that the TED spread will probably be volatile for awhile.

    I'd argue that a better indicator will be the 2-year swap spread (spread between 2-year swap rate and 2-year Treasury). If that can come down to 50 bps or so (from over 150), that would mean that the markets would be discounting spread normalization over the coming years.