There are some great comments on my blog entry from Friday about whether the TED spread really matters right now. With TED up to a whopping 348bp today, it’s worth addressing them.
One thing which comes up repeatedly in the comments is the fact that trillions of dollars of debt instruments are tied to Libor — which means that even if the interbank market is very illiquid and not used in practice, it can have enormous effects on real-world interest payments.
This is true, but it’s entirely a function of Libor, rather than the TED spread. Libor was fixed higher today, at 3.88%, and yes, that’s vastly more than investors are willing to receive from Treasury over the same timeframe. But the fact is that 3.88% is not a particularly high nominal interest rate, not when the year-on-year rate of increase in consumer prices has hit 5.4%.
So by all means get exercised about Libor; just don’t use the TED spread as a proxy for Libor.
Ben makes a similar, but separate point: 28-day funding at the Fed can be even more expensive than Libor. But once again, we’re looking at an unnatractive funding source for banks, in the light of all the overnight liquidity which has recently been injected into the banking system, and then worrying probably a little too much that it’s quite high.
It’s quite obvious that interest rates are rising right now: for banks, for companies, for consumers, for pretty much everybody, really, except the government. That’s what happens in a credit crunch, and it’s not pretty. I do think though that the best indicator of how high interest rates have risen is, well, how high interest rates have risen. Libor now is about a percentage point higher than it was through most of the summer, and that’s worrying. But let’s concentrate on that, rather than looking at the TED spread.