The spread is indicative of the degree to which banks are prepared to lend to each other, and serves as a proxy for both credit risk and liquidity in money markets. The spread has now narrowed to its lowest level since February and is likely being driven by the smaller than expected writedown reported by HSBC this morning.
The TED’s rapid narrowing suggests increased confidence in credit markets, banks, and other insitutional investors and may indicate that the worst of the credit crisis is behind us. Of course, tomorrow will no doubt bring another AIG.
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