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Monday, April 14, 2008

The TED Spread, LIBOR and EURIBOR = Scary Bad

That stubborn financial system stress isn’t going away…

Euro Money-Market Rate Remains at Highest This Year, EBF Says: “The cost of borrowing in euros for three months stayed at the highest this year, according to the European Banking Federation.

The euro interbank offered rate, or Euribor, rose about half a basis point to 4.75 percent, the highest level since Dec. 27, the EBF said today. The one-week rate was little changed at 4.23 percent.”

This means risky assets, such as equities, are going to enjoy a rough ride in the near future.

Nothing Special With Treasuries as Fed Has Mortgages (Update5): “The dollar isn't the only casualty of the Federal Reserve's rescue of seized-up credit markets. Bond traders are finding there is nothing special about Treasuries anymore, now that the Fed accepts substitutes for government securities as collateral -- having concluded it wasn't enough to reduce the benchmark interest rate for overnight bank loans six times since September.

As recently as March 21, Treasuries were in such demand that traders were willing to lend cash at rates 2 percentage points less than the Fed's target for overnight loans if they could obtain the securities as collateral. Now, the gap is back in line with the 0.06 percentage point average in the 10 years prior to August, when subprime mortgage losses spread.

The $6.3 trillion-a-day repurchase agreement, or repo, market is a barometer of sentiment because it's where firms finance trades. A narrowing of the spread between the so-called general-collateral and federal-funds rates may suggest declining demand for U.S. government debt. Treasuries have lost 0.8 percent on average since March 20, when the central bank expanded the type of debt it would take in return for the securities to include mortgage and commercial real estate bonds.”

Sounds good no? Wait for it…

“Since dealers typically use repurchase agreements to finance their holdings, movements in the rates affect the cost of holding the securities in inventory. Dealers last month increasingly let trades involving Treasuries go uncompleted because the cost to obtain the securities became too expensive.

Failures to deliver or receive Treasuries, known as fails, totaled $2.3 trillion in the week ended April 2, the highest since May 2004. Fails averaged $173.6 billion a week since July 1990, data on the New York Fed's Web site show.

The general collateral rate increased to 2.25 percent on April 9, from 0.9 percent on March 20, according to data from Jersey City, New Jersey-based GovPX Inc., a unit of ICAP Plc, the world's largest inter-dealer broker. The Fed's target rate held constant at 2.25 percent during that period.”

FAILURE TO DELIVER… or FAILS have been quietly sneaking higher. The AVERAGE value of Fails is about $173 billion a week. Last week the value of Fails was $2.3 trillion.

Aberration? Nah. Not bloody likely. This is probably foreshadowing the great fun Bears are likely to have in the very near future at the expense of the Bulls…

“The spread between the rate banks charge for three-month loans denominated in dollars and the overnight index swap rate, a measure of banks' willingness to lend, widened to 81 basis points today, or 0.81 percentage point, from 57 basis points on March 18. The low this year was 24 basis points on Jan. 24.”

The spread between the rates banks charge and three-month loans in dollars continues to bounce around at extremely stressed levels. NOTHING the Fed or any other central bank has done has been able to coerce this spread back down. That is NOT good.

“Fed and Treasury officials are considering ways to replenish the central bank's supply of U.S. bonds if needed to ensure the Fed can keep lending to Wall Street dealers. The Fed is selling some of its Treasuries to finance its lending programs.

Treasury bill, note and bond holdings at the Fed fell 21 percent to $560 billion on April 9 from $713 billion on March 5, said George Goncalves, chief Treasury and agency debt strategist at Morgan Stanley in New York. The firm is a primary dealer.

One option would be for the government to sell more debt and deposit the proceeds with the Fed, according to a Treasury official and two people at the central bank familiar with the proposal. The Fed would then use the cash to purchase Treasury notes, which it could lend to dealers.”

The BEST idea the Powers That Be are shopping around is another great debt circle jerk. They’re seriously considering having the US Treasury, which is already running a massive deficit that requires in excess of $2 billion dollars from abroad daily to finance government expenditures, sell MORE debt. The brilliant plan is then to park that debt with the Fed, so the Fed can swap it out for GARBAGE. Brilliant. Wicked brilliant.

With a declining currency, who in their right mind, from abroad, would gobble up more US government debt at these yields? Wouldn’t you first force the yield UP, to compensate for the declining currency and the ever increasing risk that the world may be reaching a saturation point with regards to appetite for US debt?

In the end, the bagholders will of course be the average taxpayer.

Watch the TED spread here.
What is the TED spread?
Understanding the TED spread.

As you can see, the spread is ramping up for another go at the old highs… Only this time the Central Banks of the world have far less tricks and ammo available to reject the advance.

To simplify: A BIG TED spread is scary bad for risky assets. Nuff said.


Anonymous said...


great posts. thank you.

I was wondering . . .

have you seen any research indicating what happens to markets after the TED spread jumps?

I know a lot of smart folks that are saying this is a bottoming "process", and are using sentiment and other measures to justify how we should have outsized returns going forward.

But with all the bad news that might just keep coming (e.g., CRE, employment)the question is: "Is it different this time?" In other words, can we really use all these contrarian measures to say the worst is over?

this is what I struggle with . . .

Ben Bittrolff said...


TED spread jumps have always coincided with weak equity returns.

I wouldn't use the contrarian measures. Not yet anyways. Wait for people to truely give up. Right now there is too much 'hope'. Wait until there isn't any left. That would be the true contrarian signal.

Anonymous said...

Very good blog Ben. Only discovered it a week or so ago.
Keep up the good work

Brant said...


In the previous post, I liked your simple math of the lowering PE doesn't exactly mean there is a bargain. I guess my novice noodle never noticed that when prices go down, the earnings can (and are) go down too to raise that same PE back to less appetizing numbers. I wish more of the bubble TV hosts would be more honest with this little bit of simple math.

Thanks for all your very informative posts and links to other blogs.

Brant, Atlannta, GA

Anonymous said...

In dumbed down terms... how much longer can the American consumer sustain oil prices at these levels? Everywhere you look every analyst is calling for oil to keep going. Maybe this is a short opportunity?

Anonymous said...

Abso-f'ing-lutely luverly!! Talk about the law of unintended, let's drag down the buck with the trash we take from those insane lending pools with the governmenteze names. Talk about the company you keep.

I remember back in the good ole dayz where you could never challenge the limits of gubbmint spendin. Coarse, them waz dayz when they was standards, like gold. N the only thing bigger than the universe was the pile o money the feds had. Now it's just another puddle, yeahhhh debasement. I guess we are all Argentinian now. Funny, you don't look blue-ish!!

Ben Bittrolff said...

How much longer can the American consumer sustain the double whammy squeeze of falling home and equity prices and of rising commodity prices?

I am betting on, "not much longer".
Months maybe. A year? said...

You should see what that May 15th Prophecy says about what will happen next with the economy which has been the only source that have been 100% accurate

Do a Google seach of the May 15th Prophecy and you will see for yourself

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smith said...

I was wondering . . .

have you seen any research indicating what happens to markets after the TED spread jumps?

I know a lot of smart folks that are saying this is a bottoming "process", and are using sentiment and other measures to justify how we should have outsized returns going forward.

But with all the bad news that might just keep coming (e.g., CRE, employment)the question is: "Is it different this time?" In other words, can we really use all these contrarian measures to say the worst is over?


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