Friday, August 21, 2009
Credit Liquidity & Market Volatility
Two years ago everyone was saying "credit freeze" was holding back the economy & markets. In the below chart I compare market volatility ($VIX) & credit liquidity (TED) against the S&P 500 ($SPX).
What is the TED spread? It's the difference between the short-term LIBOR rate (London Interbank Offered Rate) and the yield on 3-month U.S. Treasuries (a 'risk free' yield). The formula is to subtract the 3-month Treasury yield from the LIBOR rate, and you're left with the TED spread. When the TED spread is high (as in 3.0 or higher) banks are less likely to lend or borrow and when it's low or normal (below 1.0) banks are lending.
*click on chart to expand image