The TED Spread is the difference between the interest rates on interbank loans and on short-term U.S. government debt.
The “T” stands for treasuries, and “ED” is the futures symbol for the Eurodollars contract (a measure of expected interest rates in US dollars, not at all related to euros).
Investopedia defines TED Spread as The price difference between three-month futures contracts for U.S. Treasuries and three-month contracts for Eurodollars having identical expiration months.
The TED Spread is rising. So what does that mean? How does it tie into the LIBOR scandal?
For discussion, let’s take a look at the Variant Perception article More TED Spread Widening on the Way.
One of the early warning signs of the 2008 crisis was the widening in credit spreads such as the Ted spread and the Libor-OIS spread. There was a run on the shadow banking system as the credit-worthiness of many financial institutions came under suspicion in the wake of the housing crisis. Banks’ traditional forms of short-term funding such as certificates of deposit (CD) and commercial paper (CP) dried up. As a result Libor, which is supposed to reflect bank funding costs, began to rise inexorably.
Today, we are seeing some widening in the Ted spread (red line, chart below) – but for what should be predictable reasons. More onerous regulations, which are due to come into effect on October 14th, are leading to less demand for so-called prime money market funds. Given that they invest about 60% of their assets in CD and CP, this is causing bank funding costs to rise, and so Libor has been rising. The Libor-OIS spread has been widening (black line, chart below), which is reflective of tougher bank funding, but does not necessarily imply a bank-funding crisis is on the cards as this new regulation has been known about for some time. However, should Libor-OIS not stabilize then this would indicate a potential bigger problem. The Ted spread should also widen more over the next few months as money moves from prime funds to government funds, which implies higher Libor and lower UST bill yields.
LIBOR Discussion
That’s likely still not clear. Moreover there are new terms to explain for many. Stay with us for a bit, and for an interesting flashback at the LIBOR rigging scandal.
LIBOR is the “London Interbank Offer Rate”, the interest rate at which banks are willing to lend US dollars to each other, overnight. It is a stated rate, not necessarily reflective of any real transactions.
During the crisis, it was rigged. The New York Times article Tracking the Libor Scandal details the scandal.
Barclays, UBS, Royal Bank of Scotland, ICAP, Rabobank all pleaded guilty or paid fines. In December of 2013, in one fell swoop, Citigroup, JPMorgan Chase, Deutsche Bank, Royal Bank of Scotland and Société Générale were all found guilty of manipulation. In 2104, RP Martin, Lloyds, and four other banks were implicated.
In a set of rare convictions of anything that happened during the great financial crisis, a former Citigroup and a UBS trader were convicted in 2015.
Select Quotes From NY Times
- Barclays trader to an official: “We know that we’re not posting, um, an honest” rate.
- Bank of England official in an email: “They will obviously have to remove the references to us and Fed”
- Barclays email: Traders seeking favorable rates received a welcome reception from bank employees who set the benchmark. “Always happy to help,” one employee said in an e-mail.
- UBS: “I need you to keep it as low as possible,” one UBS trader said to an employee at another brokerage firm in 2008, according to the complaint. The trader promised to pay “whatever you want. I’m a man of my word.”
- ICAP: One trader resorted to begging, invoking a plea of “pretty please.” Another trader, after pressuring a colleague to submit a certain rate, offered a reward of sorts: “I would come over there and make love to you.”
- Rabobank: When one trader requested a specific rate and then expressed concern that the submitter might encounter resistance, the submitter replied: “Don’t worry mate — there’s bigger crooks in the market than us guys!”
- Deutsche Bank: “I’m begging u, don’t forget me,” one Deutsche Bank trader wrote in an online chat to an employee at a rival bank, seeking to influence rates. “Pleassssssssssssssseeeeeeeeee … I’m on my knees …”
Pay particular attention to point number 2. The Fed and Bank of England were involved in the scandal and/or coverup of the scandal.
Who was convicted? Two lowly traders.
LIBOR-OIS Spread Discussion
OIS stands for Overnight Index Swap Rate. For an explanation please consider Understanding Overnight Index Swaps.
Imagine Institution #1 has a $10 million loan that it is paying interest on, and the interest is calculated based on the overnight rate. Institution #2, on the other hand, has a $10 million loan that it is paying interest on, but the interest on this loan is based on a fixed, short-term rate of 2 percent. As it turns out, Institution #1 would much rather be paying a fixed interest rate on its loan, and Institution #2 would much rather be paying a variable interest rate—based on the overnight rate—on its loan, but neither institution wants to go out and get a new loan and they can’t renegotiate the terms of their current loans. In this case, these two institutions could create an overnight index swap (OIS) with each other.
The overnight rate in constantly changing, and you will pay a different interest rate at 6:00 am than you will pay at 11:00 am.
To resolve this issue, an overnight index swap rate is calculated each day. This rate is based on the average interest rate institutions with loans based on the overnight rate have paid for that day.
The overnight index swap (OIS) market is quite large, and the movements in this market can provide a lot of information for economists and analysts who are trying to understand what is happening in the global financial markets. One of the key pieces of information analysts watch is the interest rate the institutions who have loans with variable interest rates are paying.
Crisis Rates
The above from The Derivatives Discounting Dilemma by John Hull.
Rise in the TED Spread
With those historical tidbits out of the way, let’s return to the initial discussion of rising TED spreads. The following chart from Macro Trends provides a much better time line for discussion.
The direction is problematic, but are the volatility and magnitude of sufficient size to indicate real problems?
I don’t know. But it does merit watching. And central banks are likely watching very closely. They do not want a repeat of the crisis or even of the taper tantrum that occurred when the Fed first hinted rate hikes may be on the way and they would taper asset purchases.
Then again, volatility suppression mechanisms work, until they finally explode. There may be no warning next time.
Mike “Mish” Shedlock
Don’t know too much on the Ted… At one time it was the spread between 3 month treasuries contracts and the Euro 3 month contracts, but it’s different now. The spread is 10-50 basis points normally, if I remember right, and it looks as if it’s at the top of that limit now. Judging by the chart, the swings short term don’t look as bad as previous years… then again, the rate is really low these days and it might be harder to pick up normal flux.
In the current near zero interest rate environment, the rise in TED spread might be quite large in proportion. I am wondering if this will induce stress in banking. Perhaps they will postpone the implementation of the Oct 14 regulation if it is not too late.
That was I was trying to say. You said it much better. Funny how you mention bank stress… I used to go to the Cleveland Federal Stress Index who used to post M-F at 3PM. Jim Comiskey (RIP) did a piece on it last year. It’s an arm of the St Louis Fed, and they list bank stress using 16 idems to determine stress. Well, as of may, you can’t get info anymore:
“Cleveland Financial Stress Index under review; revised index expected Q4:2016
The Cleveland Financial Stress Index (CFSI), a measure of stress in financial markets, has been unavailable since May 9, due to the discovery of errors that overestimated stress in the real estate and securitization markets”.
Hey, now that’s a big confidence booster, aint it?
https://www.clevelandfed.org/our-research/indicators-and-data/cleveland-financial-stress-index.aspx
To put things in perspective. Rising spreads during 2008 was; Lack of dollars in the eurodollar-market(Europe)and shortage of collateral in the repo-market(MBS CDO´s), aka subprimes.
To be clear on subprimes above 7:36 PM. Subprime-collateral were not accepted at a point so rates climbed due to shortage. One has to know that interbank loans/swaps built on subprime-CDO´s grew very large up to the GFC.
European banks were the biggest contributors in gross-financing the US mortgage(MBS)-bubble. When the interbankmarket dried up the dollar-demand exploded. And by a lot of reasons.
EU banks gross financing the US MBS would not surprise me . After the introduction of the Euro the flow of capital north south was engineered on property and construction , so to include US mortgage securities into the model would have seemed second nature .
Dollars are in demand worldwide. Some expects a FED rate-hike as well. At least before Europe(euro).
Considering that the FED rigs interest rates, credit card companies arbitrarily rig consumer interest rates and fees, banks “rig” or “negotiate” consumer and business interest rates, and private parties are free to “negotiate” or “rig” interest rates however they wish, it never made any sense to me why this was a scandal in the first place.
TARP was a real scandal. The GM and other bailouts were real scandals, particularly the bond part in bankruptcy court. Traders and banks helping each other in time of need does not seem that scandalous to me. The everyday behavior of banks to consumers and smaller businesses seems a bigger scandal to me. But I am not aware of the damages or damaged parties involved in these LIBOR and TED “scandals.”
The government is the big winner (fines collected & more “control” over the banking system), and two traders convicted are the losers. But who was “defrauded” here? No one that I can identify. Seems like a fraudulent scandal to me, a dung hill. Never got any answers to these questions in the news articles, just Occupy Wall Street type propaganda. Just seems like a diversion of attention to me, to take our attention away from TARP, too-big-to-fail etc. In other words, a phony manufactured scandal to show the government doing something against the big bad banks so that the real scandalous business as usual and TARP are off the table and “immunized” against daylight and discussion.
I hold a similar view , but the effect should not be ignored , not only as you are talking the fixing of rates on over 300 trillion of instruments , but that , as traders note , if you were not part of the loop you were going to have a hard time . So this turns it into a sort of culture thing , going on a cartel that sets ethics (or lack of) :
“It is very hard, looking at the elaborate edifices of fraud that are emerging across the financial system, to ignore the possibility that this kind of silence – “the willingness to not rock the boat” – is simply rewarded by promotion to ever higher positions, ever greater authority. If you learn that rate-rigging and regulatory failures are systemic, but stay quiet, well, perhaps you have shown that you are genuinely reliable and deserve membership of the club.”
Hope that “the big club” realizes that they are depending on the sheeple to keep things going… at least for the time being. Then as the smarter sheeple develop robots to do everything, “the big club” is going to end up not needing the sheeple anymore. The End.
Poor expendable sheeple… it’s a wolf’s world.
“LIBOR is the “London Interbank Offer Rate”, the interest rate at which banks are willing to lend US dollars to each other, overnight. It is a stated rate, not necessarily reflective of any real transactions. During the crisis, it was rigged. The New York Times…” -Mish
At this point, the cognitive dissonance is deafening, and it makes no sense whatsoever to me. Any “price” that does not have to be based on transactions, can be whatever the parties agree is in their best interests. This is not like a closing gold or stock price used on a given day for tax or other purposes. “Rigged” is just “spin” to make a “good” negotiated price into a crime.
The rate is whatever the two parties agree it to be, by definition, and is not transaction based unless the parties agree for it to be. So, the rate is very malleable or a negotiation by its very nature. I would liken it to a home sales price, where previous transaction prices are sometimes a guideline and other times irrelevant to the transacting parties. So, what am I missing in this so-called scandal, other than the names of the victimized parties and the amounts the victimized parties were damaged?
This is a “false-flag equivalent,” albeit of a sophisticated financial nature rather than an Operation Gladio style incident. Rereading the article does not change my perception. Email quotes are entertaining, and no doubt convincing to many; but not to me.
When the official dollar rate, the rate national banks will pay to exchange dollars, is announced at a certain level, street traders will devise their rates around that reference. Banks referenced libor as their basis, plus commission. Libor adjustments affected that sum of new and existing loans and investment.
If you adjust a sum by 0.01% daily over several years you introduce a large error, a large cost to some and profit to others.
That said, I expect tweaking the rate, that is adjusting an entire market to suit one deal, most likely had little overall macro effect, something like stripping fractions of cents out of the accounts of others… except the now wealthy person who profited from that might be the one standing before you giving you orders. You are going to shrug that circumstance is like that, that he only scammed a few cents from your account so no difference?
That is my point.
Maybe banks should NOT reference libor alone, anymore than homeowners should take out equity loans based on home prices at bubble asset tops. Lots of other indicators could be used or blended. Investor decisions based on all sorts of indicators later turn out to be inaccurate. That’s life, happens every commodity cycle (e.g. gold, copper, oil, currencies, interest rates). Neither libor nor any other “price” should be treated as a universal fixed constant like the speed of light or pi.
Libor is not an absolute or fixed number, and comes with its own set of risks. Libor is whatever individuals decide it will be at any given transaction time. Simple as that. People will always try to make the extra pennies, on both sides. Thus, by definition libor is always rigged in a free market. A libor “fixed” by a set of government rules or an economic czar would be “rigged” differently. Theoretically, “winners” and “losers” should balance out for any given libor movement or fix. Over time, as with the stock market “scandal” about some traders having first access to information (high-speed trading), the advantages of any libor manipulation will diminish over time even in the absence of USA.gov interventions/criminalization rackets.
Odd that there are “no dead bodies” or victims, nor any quantified loss in the libor scandal, is it not? Thus, my point that the whole libor scandal, far from being a hoax, exists and was expressly manufactured or designed for political propaganda purposes. For the banks, the fines are just part of the racket, like paying protection money, a necessary PR expense or price of doing business. This “false-flag crime” provided “a change of topic” away from 2008/9 tarp, etc. (still no full public audit). which recede into the past and out of public consciousness. It is a very clever psy-op, no doubt well-planned by PhDs, MBAs etc., and with a paper trail somewhere.
COST OF LIVING WILL CONTINUE TO SKY ROCKET:
http://minecraftbuildinginc.com/flying-apartments/
Volkswagen is dead and don’t know it. Silvio Marchioni’s Fiat/Chrysler is bleeding and cannot find a buyer. Deutsche Bank et.al. are holding the bag. The bell at the top is ringing.
The “Taper Tantrum” simply revealed that there is no way to taper a Ponzi economy. If you try, you simply trigger a debt deflationary cascade of falling asset prices leading to collateral calls leading to forced asset sales leading to asset price declines and so on. Recessions also threaten to unwind the current Ponzi house of cards. This has CBs fully preoccupied. A little fraud here and there is small potatoes when you’re juggling the world financial system on a tight rope wire above a flaming Ponzi pit of flaming oil.
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