Spreads will often widen during times of international crisis as money flows to a safe haven in U.S. T-bills. a) Is it the money flows that widen the spreads? b) How does an increasing T-bill–Eurodollar spread be a bearish indicator? Pls Explain
flows…money goes into the safer haven of govt guaranteed debt,it is perceived as bearish as it shows lack of confidence in credit…it is the banks who lend the euro$ and eurodollar futures rates are set based on the 3 mth libor rate set by banks lending. Easy to observe in the market right now, look at the level of tbills to libor rates,bills are trading under the funds rate… 3m libors are trading 2%+ over the funds rate…bills offer no value here other than a safe haven,the reluctance of banks to lend to each other has pushed the ted right out as credit fears among banks reluctant to lend to each other pushes the euro$ rate higher. Flows also come into bills from other asset classes, if you were unsure about owning equities over the last month,you may put money into bills,at least you know you will get most of your money back…so these other flows can influence the spread, when asset prices stabilize and people feel more comfortable about taking advantage of higher yields available, then we will see the ted spread move back in.