Wednesday, November 19, 2008

Credit Crisis Indicators: No Progress

by Calculated Risk on 11/19/2008 10:55:00 AM

It seems these indicators are stuck ...

  • The three month LIBOR declined slightly to 2.17% from 2.22%. 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 0.105% from 0.14%. (worse). Close to zero again!

    With the effective Fed Funds rate at 0.37% (as of yesterday), this is probably somewhat in the right range. 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 is engaged in quantitative easing.

  • The TED spread: 2.07, down slightly from 2.10 (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: 105.30, up slightly from 104.25 (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.

  • Weekly Fed Balance Sheet (updated weekly on Thursday)

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

    A2P2 Spread
  • The A2P2 spread increased to 4.65 from 4.42, just below the peak of 4.72 two weeks ago. (Worse).

    Click on graph for larger image in new window.

    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 (0.45% 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.

    Another day with no improvement ...