Key credit spreads, LIBOR-OIS and TED, are on the rise once more, indicating a new freeze in the credit market as concerns about the worsening economic decline across the globe deepen. Given this reversal in what had been an improving trend and the recent new lows reached on the S&P500, I continue to recommended avoiding all financial-related stocks and any companies that rely heavily on borrowing to finance operations. For those who want to stay in equities, study the balance sheets and choose carefully. Otherwise, highly-rated investment grade corporate and municipal bonds are still my preferred choice for place to park money until economic conditions improve.
LIBOR-OIS Spread
The LIBOR-OIS spread is used by economists and financial analysts as a measure of the availability of cash among banks. The higher the spread, the fewer available dollars. The London Inter-Bank Offered Rate (LIBOR) is the interest rate that banks charge each other for three-month loans in U.S. dollars. The rate is set by a panel of banks in a survey by the British Bankers’ Association each day around noon in London. LIBOR is also used as a benchmark for approximately $360 trillion of financial products across the globe. The overnight indexed swap (OIS) rate is an interest rate swap transaction in which the overnight rate is exchanged for a certain fixed rate.
3-Month LIBOR
OIS
Spread
27-Feb-09
1.26
0.24
1.02
1 Week Prior
1.25
0.23
1.02
1 Month Prior
1.18
0.23
0.95
3 Months Prior
2.2
0.42
1.78
6 Months Prior
2.81
2.04
0.77
1 Year Prior
3.01
2.29
0.72
The LIBOR-OIS began rising more than one year ago, when the credit crisis began with defaults in subprime residential mortgage loans. It reached a peak last Fall when the credit crisis resulted in a complete freezing of credit markets. Since then, the spread has eased, but remains more than twice the elevated level of one year ago. In other words, lending is slowly returning to the market, but is still far from normal. By comparison, the LIBOR-OIS spread averaged 9 basis points (.09 percent) in the 12 months before the credit crisis began in August 2007.
TED Spread
Another slightly positive sign of credit market thawing is a measure of the cost of credit, the TED spread, which is the difference between what the government and companies pay for three-month loans. It rose to 104 basis points (1.04 percent), compared with 94 basis points (.94 percent) on Feb. 13, 2009, and a record high of 464 basis points (4.64 percent) on Oct. 10, 2008. The gap averaged 27 basis points (0.27 percent) from 2002 through 2006, before the credit crisis began in 2007.
Credit Spreads: 2-27-09; Rising as Credit Market Goes Cold
Posted by Gregg Killoren on March 2, 2009
Key credit spreads, LIBOR-OIS and TED, are on the rise once more, indicating a new freeze in the credit market as concerns about the worsening economic decline across the globe deepen. Given this reversal in what had been an improving trend and the recent new lows reached on the S&P500, I continue to recommended avoiding all financial-related stocks and any companies that rely heavily on borrowing to finance operations. For those who want to stay in equities, study the balance sheets and choose carefully. Otherwise, highly-rated investment grade corporate and municipal bonds are still my preferred choice for place to park money until economic conditions improve.
LIBOR-OIS Spread
The LIBOR-OIS spread is used by economists and financial analysts as a measure of the availability of cash among banks. The higher the spread, the fewer available dollars. The London Inter-Bank Offered Rate (LIBOR) is the interest rate that banks charge each other for three-month loans in U.S. dollars. The rate is set by a panel of banks in a survey by the British Bankers’ Association each day around noon in London. LIBOR is also used as a benchmark for approximately $360 trillion of financial products across the globe. The overnight indexed swap (OIS) rate is an interest rate swap transaction in which the overnight rate is exchanged for a certain fixed rate.
The LIBOR-OIS began rising more than one year ago, when the credit crisis began with defaults in subprime residential mortgage loans. It reached a peak last Fall when the credit crisis resulted in a complete freezing of credit markets. Since then, the spread has eased, but remains more than twice the elevated level of one year ago. In other words, lending is slowly returning to the market, but is still far from normal. By comparison, the LIBOR-OIS spread averaged 9 basis points (.09 percent) in the 12 months before the credit crisis began in August 2007.
TED Spread
Another slightly positive sign of credit market thawing is a measure of the cost of credit, the TED spread, which is the difference between what the government and companies pay for three-month loans. It rose to 104 basis points (1.04 percent), compared with 94 basis points (.94 percent) on Feb. 13, 2009, and a record high of 464 basis points (4.64 percent) on Oct. 10, 2008. The gap averaged 27 basis points (0.27 percent) from 2002 through 2006, before the credit crisis began in 2007.
Posted in Credit Crisis, Credit Spreads, Economy, Investing, Market Commentary, Personal Finance | Tagged: Credit Spreads, Economy, Investing, Market Commentary, Personal Finance | 1 Comment »