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Rising TED Spread Says ‘Hold on There’ to EU Bailout

May 11th, 2010 Michael McDonough

A slipping Euro isn’t the only indicator hinting that Europe’s unprecedented bailout may be insufficient to ease market fears over the developing debt crisis.  3M LIBOR (the intra-bank borrowing rate for USDs) has again begun to tick upward, albeit modestly; halting a retrenchment in the 3M TED spread.  The spread has average 18.8bps over the course of the year, but currently stands at 28.6bps (see chart), well off the year’s low of 10bps.  This could indicate deteriorating credit conditions as confidence within the banking sector diminishes; the TED spread reached a high of around 460bps after the fall of Lehman.  While the market is still far from these levels, movements in the TED Spread and LIBOR should be monitored due implications on future credit conditions and the fact the rate is used to price a number of derivatives and adjustable rate mortgages.  Yet, over the short-term the reopening of the Fed’s swap lines with other central banks around the world could help alleviate this problem as fresh USDs are poured into these markets that the central banks can in turn lend to other banks within their jurisdictions, increasing liquidity.  

Source: Bloomberg

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