The graph above (source:bloomberg) which basically measures the spread between 3 month libor and 3 month treasuries suggests that the ongoing turmoil is far from being resolved. The degree of volatility and the extent to which spreads have widened ever since the subprime debacle hit markets a year and a bit ago is spectacular. We went from a low of 18 basis points (before the first wave reached the shores) to a whopping high of 240 basis points (as the subprime crisis unraveled). Looking at the way in which spreads have evolved, it is clear that Fed efforts to quell markets have only had temporary success right until the next crisis would hit markets (the last spike on the graph relating to the Bear Stearns crisis). Currently, despite the recent reversal in commodities and dollar trends (both welcome developments for the economy), the spread has begun to widen, suggesting that lenders continue to be weary and confidence is far from being restored. Spreads seem to be widening across the board (making financing and taking out a mortgage more expensive for businesses and households respectively) contributing as a material drag to economic growth. Unless spreads reverse course, the next couple of quarters are likely to be very sluggish.25 August, 2008
A matter of spreads...
The graph above (source:bloomberg) which basically measures the spread between 3 month libor and 3 month treasuries suggests that the ongoing turmoil is far from being resolved. The degree of volatility and the extent to which spreads have widened ever since the subprime debacle hit markets a year and a bit ago is spectacular. We went from a low of 18 basis points (before the first wave reached the shores) to a whopping high of 240 basis points (as the subprime crisis unraveled). Looking at the way in which spreads have evolved, it is clear that Fed efforts to quell markets have only had temporary success right until the next crisis would hit markets (the last spike on the graph relating to the Bear Stearns crisis). Currently, despite the recent reversal in commodities and dollar trends (both welcome developments for the economy), the spread has begun to widen, suggesting that lenders continue to be weary and confidence is far from being restored. Spreads seem to be widening across the board (making financing and taking out a mortgage more expensive for businesses and households respectively) contributing as a material drag to economic growth. Unless spreads reverse course, the next couple of quarters are likely to be very sluggish.
