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Strategies & Market Trends : John Pitera's Market Laboratory

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To: Nikku Nayar who wrote (4231)	7/11/2001 1:53:14 PM
From: John Pitera	Read Replies (2) of 33421

Nikku, you will really like Stigum's "The Money Markets", I've been rereading it, so tell me what you find especially interesting or vexing and I'll take a look at the book as well. Now to answer your question and it's a very pertinent question with the current Argentinian currency and debt situation. Can you tell me why the monthly charts for the Eurodollar and Treasury Bills (13 week ...?) seem to look almost identical? the charts look very similar because they are both charts of short term US rates. The difference is that TBills are backed by the full faith and credit of the US Government. US dollar denominated deposits offshore are not backed by this same guarantee. Normally there is not much concern about a banking or financial crisis and hence the spread between the two is stable, and on the narrow side. This is know in the industry as the TED spread (Treasuries- Euro Dollars). But in times of impending financial crisis the Eurodollar deposits not backed by the US Govt, may undergo more selling pressure and/or US TBills go to a greater price premium due to the safety factor. Savvy traders have put on this TED spread trade in the past, if they see storm clouds looming that indicate a financial crisis is brewing. If a problem like the Asian crises of 1997-98 occurs, the TED spread expands. Watching this spread as well as the spread between junk bonds and US Govt bonds and swap spreads can all be used as a barometer of the perceived stability of the International financial system. John

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