It's now been just over a week since the FED, treasury and central banks around the world made some massive interventions to try and stabilize the credit markets.  My prediction is that these interventions would do very little to unlock the credit markets the main issue is trust, not liquidity.  I've been watching many different indicators very closely for signs of recovery over the last week.

One of the main indicators of health in the credit markets is call the TED Spread.  I've discussed it many times on this blog but it's basically the spread between three month treasuries and three month LIBOR rates.  The higher the spread, the more stress in the system.  Historically it averages 30 basis points, over 200 is signs of a crisis, and it had reached 454 basis points before the interventions.  In the week or so since it's collapsed back to 266 basis points.  While still in critical condition this is appears to be a very good sign, and the financial media have been crowing about the credit markets being on their way to normalization.

Why it might be a false signal?

Something didn't smell right to me about the recovery and today's Treasury auction have shed some light on where the smell was coming from.  Most of the recovery in the TED spread has been in the yield of short term treasuries increasing not LIBOR rates coming down (though they have come down substantially).  The increase of treasury yields would typically indicate people are leaving their bunkers and starting to move their money back into riskier assets, BUT...  The treasury auction demonstrated the yield increase is not coming from the demand side, but the supply side.  Yields are increasing on short term treasuries not because people are moving out of bunkers but the US Treasury is absolutely flooding the market with short term debt.  This is not good, not good at all.

Here's a chart of the t-bill issuance by week, as you can see it appears to be going parabolic.

I've also seeing many "weird" movements in asset classes from currency to bonds to commodities that are setting off my alarm system.  I haven't been able to figure out what exactly they mean but something is emitting a very bad smell right now...