Earlier in the week we posted a commentary regarding the TED Spread’s return to pre-recession levels. Since this is largely an indication of how frozen or unfrozen the credit market is, the reason it’s of interest is clear. More importantly though, the sub-1.0 level the TED Spread seems to have become comfortable with during the last month (below 100 basis points) does indeed suggest that borrowers can actually get loans again, pretty much the same way they could before or during mid-2007. Good news, right?

There’s another indication, however, that tells us lending isn’t as completely healthy as it was before and during the middle part of 2007 (before everything fell apart).

It’s called the LIBOR-OIS Spread, and it’s still a little too high.

We’ve explained how the LIBOR-OIS Spread is a credit indicator before, so we won’t belabor it again. If you want the Full Monty though, here’s the original description.

If you don’t want the grueling details, the LIBOR-OIS Spread is simply the difference between the London InterBank Offered Rate and the Overnight Index Swap rate (or the interest rate charged for short-term interbank loans all banks need from time to time). As such, LIBOR-OIS spread is the perceived - though generally accurate - availability of funds available for short-term loans. The lower, the better the liquidity.
Anyway, the LIBOR-OIS Spread ’should’ be at or under 0.15% (15 basis points), like it was until July of 2007. However, it’s currently at 0.38% (38 basis points). Take a look, then keep reading.

Is that so high that it will continue to be a crimp on lending? In the opinion of this analyst, no, 38 basis points is a tolerable LIBOR-OIS Spread. It’s sure a lot more friendly than the 0.7% readings we saw for most of 2008, and it’s definitely a lot easier than the 3.8% peak we saw in October of last year. In other words, lenders and underwriters can work with it.

It’s certainly not a return to the glory days of ending though…. not like 2007 and earlier, when the only requirement for getting a loan was a name and a pulse (and the pulse was optional in many cases).

In the short run, this will continue to keep the economic recovery from blasting off; the re-expansion effort may almost be imperceptible. This relatively LIBOR-OIS Spread will not prevent the recovery from happening though.

In the long run, it will mean healthier loans, and hopefully, a better-contained real estate market.

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