Thursday, January 15, 2009

Is risk going down?

In May, we asked where the risk went, as measures of volatility declined dramatically. In September, volatility rose dramatically. Now, it has recently fallen again. In addition, the TED spread between risk free treasuries and the rates that banks charge each other has declined again:
The premium that banks pay to borrow money compared with the U.S. Treasury narrowed to the least in five months, signaling the freeze in credit markets that began 18 months ago is starting to thaw.

The difference between the London interbank offered rate, or Libor, that banks say they charge each other for three-month loans in dollars and the yield on the three-month Treasury bill, fell 12 basis points to 98 basis points today. The so-called TED spread last closed below 100 basis points Aug. 15. Dollar Libor dropped to 1.09 percent today, the lowest level since June 2003.

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