The so-called TED spread, which climbed rapidly at the beginning of 2007 and stayed elevated for two years, traditionally is viewed as a sign of financial instability. The spread moved sharply in the final weeks of 2015, more than doubling from its Dec. 8 level of 0.21 percentage point. It is now at 0.43 percentage point. That is its highest level since 2012, when markets were pressured by fears of a sovereign-debt crisis in Europe
…
[But the reasons may be different this time… ] one is leading transactions on more securities to go through clearinghouses, which require collateral such as T-bills, according to Jerome Schneider, head of the short-term and funding desk at Pacific Investment Management Co. The result is that “demand in the very front end hasn’t recalibrated to higher yield levels,” he said.
At the same time, money-market funds, which are faced with fresh requirements meant to safeguard them from runs during market upheaval, are changing in composition. Investment companies such as Fidelity Investments are shifting some prime funds, which can own commercial paper, to government funds. That adds to demand for T-bills while alleviating downward pressure on the London interbank offered rate, according to Gennadiy Goldberg, a U.S. rates strategist at TD Securities.
…
Thus the TED spread’s surge is a mechanical result of its two components moving in different directions for reasons mostly unrelated to the creditworthiness of banks. Treasury-bill yields are down, Libor is up, so the TED spread is up, too. Yet even if factors other than financial stress are driving the move in the TED spread, there is an inkling of unease…