Money market back to normal, one year later

Conditions in money markets have improved immensely since the start of the year. It is money markets that provide the liquidity essential to the functioning of all other financial markets.

Before the GFC, most of us had never heard of the TED spread, let alone worried about the spread between the three-month overnight index swap rate and the three-month bank bill rate or Libor, but these are the key measures of conditions in global money markets. At the start of the year the spread between three-month OIS and Libor for United States dollars was at 200 basis points and now it is at 12 bps - a very normal level.

For Australian dollars the equivalent spread started the year around a much more modest 50 bps and is currently around 16 bps. The spread did get as low as 11 bps in late July - a level that would be considered normal.

Global credit markets, as reflected in the US CDX, European Main and Aussie iTraxx CDS indices, have improved considerably. Although it is acknowledged that all indices have rolled twice during the period, with the most recent rollover occurring last Monday.

If each index is assumed to have started the year at 100, then it easy to see the relative performance of each: the Aussie iTraxx has been the star performer with the index narrowing by 71 per cent over the period. The US CDX and European Main indices have both narrowed by around only 55 per cent.

As for equities, the US S&P500 index is up around 13 per cent from the start of the year and the S&P200 index is up around 27 per cent. However, at the markets' nadir in March they were down by 27 per cent and 15 per cent, respectively. The VIX index, which measures volatility in the S&P500 index, is down by 35 per cent since the start of the year and was up by 30 per cent in March.