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Bank Fever Chart Remains Dangerous

by | September 25th, 2008 | 04:12 pm
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The continued danger levels on a leading indicator of bank stress suggest it is time to complete the Troubled Asset Relief deal rather than delaying for additional Monday morning quarterbacking.

The “Ted Spread” between the interest rate paid on short-term US Treasury paper and the London Inter-bank Offer Rate (LIBOR) is one barometer of financial sector stress. A flight to quality depresses the return on short-term government paper, while a reluctance of banks to lend to each other causes the LIBOR rate to rise.

The one-month Ted Spread widened yesterday (Wednesday) to its largest gap during the entire financial crisis, reaching 329 basis points in comparison with its daily average of 102 basis points since the beginning of 2007. Moreover, although one-month LIBOR was up slightly less than 100 basis points from the beginning of September, reports indicated that minimal volumes of interbank lending were actually taking place.

After news of an agreement this afternoon (Thursday) on the Troubled Asset Relief Program, the four-week Treasury rate rebounded to about 0.5 percent from the remarkably low 0.14 percent yesterday. But compensation of half a percentage point interest in the face of consensus inflation expectations of 2.9 percent (2009) reflects continued acute anxiety in financial markets. The Ted Spread remains at its 99th percentile highest level for the past 20 months despite prospects of the deal.

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