Comment: With three-month US TBill yields firmly anchored at 0.01% and three-month Eurodollar Libor rates creeping steadily up to 0.42% today, the TED spread is at its widest in eighteen months. More worryingly, the 50 basis point level has been a barrier to extreme financial stress many times in the last thirty years. While rising Libor rates might be seen as market participants pricing closer to reality than fiction, we fear that a sustained break above 50 could presage a massive blow-out in this spread to 120 or even 250 basis points as happened in 1987 and 2008.
Strategy: Buy the TED spread on a weekly close above 50, then hang on to your hats!
