With the TED spread (Treasury – EuroDollar Spread) cooling off from recent YTD high set in late June, markets seem to be less worried (or at least have already discounted) some of the increases risk that European banks and countries face. The costs of lending between banks in Europe has come down considerably since the Greece fiasco (Even though Greece’s cost of borrowing continues to go up), but still remain at relatively high levels if compared to what U.S banks are lending money at. Could this be a warning sign of worst things to come from Europe, or is this increase in cost of lending between banks and countries within the EU zone the “new normal”?
Also, junk bond demand picked up steam this week as did equities. The correlation that I spoke before between junk yields and equities continues to hold. What happens to markets when this correlation starts to break? Does it necessarily mean lower stock prices?
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