Tuesday, May 25, 2010

How Fearful is the Market?

As the sovereign-debt crisis in Europe develops, market participants are pricing larger scale systemic risks.

Libor and Libor-OIS spread
The dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, widened to the most since July 16. The cost of borrowing in euros for three months climbed to 0.64 percent.Libor has more than doubled this year.

The Libor-OIS spread widened to 31.6 basis points from 28.4 basis points. The spread, which compares three-month dollar Libor and the overnight indexed swap rate, surged to 364 basis points, or 3.64 percentage points, after the collapse of Lehman Brothers Holdings Inc. in September 2008.
TED spread
Another gauge of fear, the TED spread, the gap between the three-month T-bill interest rate  and three-month Libor jumped to 36.9 basis points, also the highest since July. The TED spread -- -- spiked in October 2008 to more than 460 basis points. Adding to the sign of rising costs for companies to borrow funds is two-year swap spreads that just rose to 58 basis points, the highest since May 2009.
Volatility Index of S&P 500, VIX, now a popular barometer of fear factor, rose to 34.61 today. It reached a peak of 80 in October 2008.

No comments: