TED Spread Narrows to Least Since Lehman on Rates, Cash Flood

The TED spread, a gauge of banks’ willingness to lend, slipped below 150 basis points for the first time since before the collapse of Lehman Brothers Holdings Inc. amid speculation U.S. borrowing costs near zero and promises of further government cash will help unfreeze credit.

The spread, the difference between what banks and the U.S. government pay to borrow money, narrowed as the London interbank offered rate, or Libor, for three-month dollar loans fell and Treasury borrowing costs rose. The Libor dropped three basis points, or 0.03 percentage point, to 1.47 percent, the British Bankers’ Association said today. The rate on the three-month Treasury bill added 4 basis points to minus 0.009 percent.

“There are expectations central banks will keep liquidity in the market and we have more or less a zero rate in the U.S., so over time the fixings should ease off,” said Jan Misch, a money-market trader in Stuttgart at Landesbank Baden- Wuerttemberg, Germany’s biggest state-owned lender. “After the turn of the New Year we should see a softening of these rates.”

Central banks are pumping money into the financial system to combat the worst economic slump since the Great Depression. Credit markets, which seized up after Lehman’s bankruptcy, remain locked amid almost $1 trillion in losses and writedowns tied to mortgage-related securities. The Federal Reserve cut its benchmark rate to as low as zero last week and said it will flood the economy with cash.

TED Spread

The TED spread decreased three basis points to 148 basis points, the least since Sept. 12. The measure remains historically high, having averaged 38 basis points in the year before the credit crisis began in August 2007.

The Libor-OIS spread, a gauge of cash scarcity favored by former Fed Chairman Alan Greenspan, narrowed three basis points to 126 basis points. The spread averaged 8 basis points in the year before the start of crunch and will narrow to 92 basis points by March, forwards contracts show.

Lower interest rates aren’t being passed onto consumers. While the average cost of a fixed 30-year mortgage fell to 5.19 percent on Dec. 18, that’s 371 basis points higher than the three-month dollar Libor, compared with an average 97 basis points in the 12 months before the crisis.

Banks increased deposits with the European Central Bank in its overnight facility Dec. 19 even after the interest rate paid was reduced a day earlier. Deposits rose to 230.7 billion euros ($322.9 billion), the third straight day they exceeded 200 billion euros. The daily average in the first eight months of the year was 427 million euros.

‘Getting Worse’

“There’s no pickup in actual volumes of lending in the interbank market,” Misch said. “It is probably getting worse because of the year-end, as banks try to keep their balance sheets as small as possible. There’s no guarantee volumes will pick up in the New Year.”

The Tokyo three-month interbank offered rate, or Tibor, slipped almost 11 basis points, the most in a decade, to 0.796 percent, after the Bank of Japan last week cut its benchmark rate and said it would adopt new ways of adding money to the system. Hong Kong’s interbank offered rate, or Hibor, for three- month loans fell five basis points to 1.05 percent, the lowest level since January 2005. The euro interbank offered rate, or Euribor, for three-month loans fell three basis points to 5.05 percent, the lowest level since June 27, 2006.

Libor, the benchmark for $360 trillion of financial products worldwide, is set by a panel of banks in a survey by the BBA before noon each day in London. Euribor is set earlier in the day by members of the European Banking Federation.

Libor may suffer a “re-explosion” by June should the financial crisis worsen, ING Groep NV said Dec. 19.

“The systemic risk hasn’t gone away, and it’s entirely possible that the risk may re-elevate in the next six months,” Padhraic Garvey, head of investment-grade debt strategy at ING in Amsterdam, said in an interview. “The risk is if something happens -- banking sector troubles, hedge funds troubles -- and leads to a breakdown in trust again, then Libor will go up.”