Doug and Ted’s Excellent Adventure

Main content

Credit spreads have declined since the 2008 crisis, yet still offer good opportunity; TED spreads are at the low end of the normal range despite debt and deficit concerns.

Consumer spending surged .6% in April, the highest in 5 months, China manufacturing and non-manufacturing PMI’s reaccelerated and moved higher than consensus, initial jobless claims and continuing claims fell by more than expected and oil is now back down in the sixties. However, trade tariff worries and Italy contagion fears are tripping up equity investors. On the other hand, fixed income investors are not too worried. The TED spread measures the rate difference between LIBOR and U.S. Treasury bills. It is a general indicator of credit conditions because the U.S. Treasuries are considered risk free while LIBOR is the interbank lending rate and reflects counterparty risk. If credit conditions deteriorate, banks will require higher lending rates to compensate them for the risk. So comparing the safe, risk-free U.S. Treasury bills to the rate that banks charge each other is an effective method of evaluating true economic and credit conditions. On September 30, 2008 the Ted spread was 315 basis points. Today it is 43. This is down from last month when it was 55. Banks aren’t too worried about the geopolitical landscape, so maybe equity investors should not be either. Please watch Voya’s Chief Market Strategist, Doug Coté, light it up on CNBC and follow the TED spread on page 37 of the Global Perspectives book.

Footer content