Why the TED Spread Action is Puzzling
Getting back to the TED Spread that we've been following for some weeks, there are some new developments. But before we get to that, what the heck is the TED Spread?
Basically it's the difference between the interest rate on 3-month treasury bills and the interest rate on LIBOR. (If you want more specifics on these items, click on either LIBOR or TED Spread, and you'll go to Wikopedia sites.)
What we're looking at is a "spread" between a risk-free rate and a less than risk-free rate. Treasury bills are considered a "risk free" asset because they're backed by the U.S. government. The LIBOR rate isn't risk free, since it's the rate that commercial banks charge each other when they lend to each other on the London wholesale money market. Since the loans (typically short-term, overnight loans) aren't secured, there's some risk that the borrower won't repay the lender, so that's why they're not risk-free.
Most of the time LIBOR and the 3-month treasury aren't that far apart. That's because most of the time, commercial banks aren't concerned that they won't be paid back if they lend to another commercial bank overnight. It's only when there's a growing credit crunch - which causes fear in the market - that you get LIBOR spiking up. And if LIBOR spikes up, T-bill rate usually goes down, since money flows to the risk-free asset when there's fear.
So we've been watching the TED Spread because it's been edging up. Plus, if you remember, those moving averages have now crossed over, causing the momentum to shift to a higher spread.
But let's recognize something important right now. The momentum of change - the change being the increase in the TED Spread - is slowing down. And the last rise was accompanied by "divergence" in MACD. Anytime you see divergence like that, plus a lessening of rate of change (ROC) even as in item increases, you have to take the increase with a grain of salt. Sometimes a correction in the trend will follow.
So for right now, we're not going to worry too much about the TED Spread until we see how this divergence plays out. (Again, one of the things that typically follows a serious move up in the TED Spread is some shake out in the stock market.)
Oh, and if you're wondering why this gauge is called the "TED Spread" you definitely want to check the Wiki entry since it explains how it got its name originally.
So for now, we're on hold, but watching daily. If the divergence winds up correcting the spread, I'll probably post something; if the divergence proves to be some kind of head fake, I'll probably post something to that effect. We'll see what develops.
Basically it's the difference between the interest rate on 3-month treasury bills and the interest rate on LIBOR. (If you want more specifics on these items, click on either LIBOR or TED Spread, and you'll go to Wikopedia sites.)
What we're looking at is a "spread" between a risk-free rate and a less than risk-free rate. Treasury bills are considered a "risk free" asset because they're backed by the U.S. government. The LIBOR rate isn't risk free, since it's the rate that commercial banks charge each other when they lend to each other on the London wholesale money market. Since the loans (typically short-term, overnight loans) aren't secured, there's some risk that the borrower won't repay the lender, so that's why they're not risk-free.
Most of the time LIBOR and the 3-month treasury aren't that far apart. That's because most of the time, commercial banks aren't concerned that they won't be paid back if they lend to another commercial bank overnight. It's only when there's a growing credit crunch - which causes fear in the market - that you get LIBOR spiking up. And if LIBOR spikes up, T-bill rate usually goes down, since money flows to the risk-free asset when there's fear.
So we've been watching the TED Spread because it's been edging up. Plus, if you remember, those moving averages have now crossed over, causing the momentum to shift to a higher spread.
But let's recognize something important right now. The momentum of change - the change being the increase in the TED Spread - is slowing down. And the last rise was accompanied by "divergence" in MACD. Anytime you see divergence like that, plus a lessening of rate of change (ROC) even as in item increases, you have to take the increase with a grain of salt. Sometimes a correction in the trend will follow.
So for right now, we're not going to worry too much about the TED Spread until we see how this divergence plays out. (Again, one of the things that typically follows a serious move up in the TED Spread is some shake out in the stock market.)
Oh, and if you're wondering why this gauge is called the "TED Spread" you definitely want to check the Wiki entry since it explains how it got its name originally.
So for now, we're on hold, but watching daily. If the divergence winds up correcting the spread, I'll probably post something; if the divergence proves to be some kind of head fake, I'll probably post something to that effect. We'll see what develops.
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