Thursday, November 20, 2008

Credit Crisis Indicators: Flight to Quality

by Bill McBride on 11/20/2008 10:19:00 AM

  • The three month LIBOR declined slightly to 2.15% from 2.17%. The three-month LIBOR rate peaked (for this cycle) at 4.81875% on Oct. 10. (slightly better)

  • The yield on 3 month treasuries increased to 0.01% from 0.1054%. (worse). Essentially zero - flight to quality!

    The 10-Year Treasury Note yield is at 3.14%.

    The effective Fed Funds rate was at 0.38% (yesterday). At some point, I'd like to see the effective Fed funds rate close to the target rate (currently 1.0%) and the 3 month yield within 25 bps of the target rate.

    But for now, the Fed appears engaged in quantitative easing.

  • The TED spread: 2.09. (unchanged)

    The TED spread is stuck above 2.0, and still too high. The peak was 4.63 on Oct 10th. I'd like to see the spread move back down to 1.0 or lower. A normal spread is around 0.5.

  • The two year swap spread from Bloomberg: 103.0, down slightly from 105.30 (unchanged). This spread peaked at near 165 in early October, so there has been significant progress, but I'd like to see this below 100.

    Spread Corporate and Treasury
  • Spreads between 30 Year Corporate and Treasury Yields

    This graph shows the spread between 30 year Moody's Aaa and Baa rated bonds and the 30 year treasury. The Moody's data is from the St. Louis Fed

    There are periods when the spread increases because of concerns of higher default rates (like in the severe recession of the early '80s), but the recent spread is unprecedented. Worse

  • Weekly Fed Balance Sheet (updated weekly on Thursday afternoon)

    The Federal Reserve assets increased $139 billion last week to $2.214 trillion.

  • The A2P2 spread increased to 4.83 from 4.65 (Worse). New record high for this cycle!

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

    The Fed is buying higher quality commercial paper (CP) and this is pushing down the yield on this paper (0.43% yesterday!) - and increasing the spread between AA and A2/P2 CP. So this indicator has been a little misleading. Also the recession is creating concern for lower rated paper. Still, if the credit crisis eases, I'd expect a significant decline in this spread.

    Note:on quantitative easing, see Bernanke's paper from 2004: Conducting Monetary Policy at Very Low Short-Term Interest Rates One thing is clear - the target Fed funds rate is pretty much meaningless right now.