Good News Update: TED Spread, Lending, Liquidity

There are several signs that the credit markets continue to heal and ­the willingness to take risk is being restored. The most important is that the TED spread (an indicator of banks' willingness to lend to each other) continues to narrow. With the three-month LIBOR at 0.30 percent and three-month Treasuries at just 0.13 percent, the TED spread has fallen to just 17 basis points. Keep in mind that the spread reached more than 4.5 percent nearly one year ago. This is now about as good as it gets.

The second important trend is that Fed data shows that the primary dealers are lending more to buyers of high-yield corporate loans, mortgage-backed and other asset-backed securities. Their holdings of $27.6 billion of such securities as collateral for financings lasting more than one day as of Aug. 12 was up 75 percent from just three months earlier.

Third, the spread between Treasuries and corporate debt has narrowed dramatically. For example, in the last six months the spread for high-yield bonds was cut by more than half, falling from above 8 percent to less than 4 percent. And the spread of 10-year AAA corporate debt to Treasuries, which exceeded 2 percent during the crisis, has fallen to less than 0.7 percent. And liquidity has been restored. Corporations are issuing a record amount of debt.

While the media tends to focus on the rising unemployment figure (a lagging indicator of the economy), the flight to liquidity and safety has begun to unwind. Markets (and investors' willingness to take risk) are returning to normal. This is one of the major factors behind the rally in the equity market (which is a leading indicator of the economy).