Thursday, October 16, 2008

TED spread

The TED Spread explains the difference between 3-month US treasury bills and LIBOR (London Interbank Offered Rate). It is useful in identifying current credit conditions, and below entails a graph if it in the past year off bloomberg compared to the VIX index.

The chart shows a positive correlation between the TED Spread and the VIX, where we can conclude that it holds a significant negative correlation to US stock indexes. Furthermore, the above suggests that banks have become increasingly unwilling to lend to each other.

So from this standpoint, as long as financing remains difficult and (very) expensive, the big players will keep selling. Trying to pick local bottoms and going long would be very dangerous.

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