When I mentioned that I wanted to write a note on the Ted Spread to my Macro colleagues this morning, Andrew Barber rightly questioned whether it was a unique thought given that it was a top story on Bloomberg this morning. I'm not necessarily sure it is a unique thought, but I do think it is important for all equity investors to be well aware where this key measure of risk is trading.
As of today, the Ted Spread had narrowed to 69 basis points, which is a level not last seen since August 9th, 2007 (and we've outlined in the chart below). We cannot say enough times, while the patient (being global equity markets) may still be in the hospital, the world is a dramatically different place than November of 2008 when the Ted Spread was over 400 basis points.
The Ted Spread and the steepening yield curve chart we showed earlier this week are most relevant for one sector, financials. As was noted in our Sector View this morning, financials are in a positive TREND. As Keith pointedly said, "I won't short them." We might not be long, but not being short is a signal in and of itself.
The rate at which commercial banks can borrow money is at a multi-year low and the yield curve is at a multi-year high in terms of steepness, which enables banks to borrow long and lend short for a reasonable profit. While I'm certainly no financials analyst, both the Ted Spread and shape of the yield curve are fundamental positives that anyone trying to short the financials should have front and center.
We borrowed the title from English pop band, Right Said Fred, who were best known for their hit, "I'm Too Sexy." The Ted Spread is speaking loud and clear and while looking at credit spreads may not be sexy or unique, when they speak, we listen.
Daryl G. Jones