VIX Signals Panic Yet TED Spread Remains Mild

The Volatility Index (VIX) and the TED spread (the spread between 3-month T-Bills and the 3-month LIBOR, or for the non-financier the spread between risk-free assets and risky assets) are useful measures of the pricing of risk within equity and credit markets. The chart below shows that the VIX and the TED have jumped off their 2010 lows both trading up over 200%. This is a very important indication of increased fear in the market as the impacts are on the margin for lending in particular.

Yet, it is very interesting to note that the Friday high in the VIX is 46.2% off its all-time highs of 89.53% made in October 2008. Meanwhile, the TED spread's Friday high was 34.37 basis points, a huge 92.6% off the October 2008 highs of 463.62 bps made amidst the ensuing panic after Lehman Brothers' bankruptcy froze credit markets. While the increases on the margin are highly relevant, it is encouraging to see the TED remain so depressed even while the Eurozone is overtaken by fears of a debt collapse. Credit markets are still functioning relatively well even with the 12% correction in equity markets provoking a considerable surge in implied volatility.

	All-Time Highs October 2008	2010 Low	Friday High	% Increase From Low	% Off All-Time High
TED Spread	463.62 bps	10.57 bps	34.37 bps	225%	92.6%
VIX Index	89.53%	15.23%	48.2%	216%	46.2%