IS THE TED SPREAD A SIGN OF INVESTOR COMPLACENCY?

According to analysts at Wells Fargo the TED spread’s rapid decline is showing signs of complacency among investors who are seeking risk.  While the bond market continues to foreshadow a very weak economic recovery risky asset investors can’t get enough.  Bloomberg reports:

U.S. investors are on “an incredible risk-seeking mission” that belies a still-shaky economy and financial system, according to Gina Martin Adams, a strategist at Wells Fargo Securities LLC.The CHART OF THE DAY shows the Ted spread, a widely followed risk indicator, dropped last week to its lowest level since 2004. This gauge tracks the difference between rates that banks and the U.S. Treasury pay to borrow for three months. A narrower spread reflects greater confidence in U.S. assets.

ted

The gap shrank last week to 16 basis points, far below an October 2008 peak of 463 basis points. Each basis point amounts to 0.01 percentage point. Martin Adams included a similar chart today in a report that raises doubts about whether rallies in riskier assets, especially stocks, will persist.

When the spread was last so small, “the global economy was surging, housing prices were soaring, and credit concern was the last thing on most investors’ minds,” the report said.

The gains in government debt that have accompanied stocks’ rise since June are also a cause for concern, she added. Yields on 10-year Treasury notes are lower than they were when the U.S. financial system began imploding last year, as the report noted.

“There is likely one dominant force keeping bonds from selling off, and that is the fear of deflation,” she wrote. “Investors should be wary of a difficult economic future.”

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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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