A lot has been written recently about the rise in yield of LIBOR, the short-term rate that banks charge each other, even as rates on other short-term fixed income instruments have fallen. Reasons have ranged from impact of the collapse of the asset-backed commerical market to hoarding of cash (and not lending it out) to broader liquidity issues.
One thing that we learned from our fixed income strategist mentor (for me, the great Curtis Shambaugh) is that if you are looking for a reliable barometer of fear and greed, the TED spread is practically unbeatable.
The "T" in TED is the Treasury bill yields, and the "ED" is Eurodollar futures, the way the market trades future 3-month LIBOR settings. Because of their risk-free nature, Treasuries will always yield less than LIBOR, so the wider the spread between the two, the more fear is apparent in the market.
Therefore the spot TED spread is very wide (at a 20-year high according to some), indicating lots of current fear. But the future TED spreads are much narrower, since the T-bill curve is positively sloped (3-month bill yield = 4.07%; 6-month bill yield = 4.20%) but the Eurodollar curve is massively inverted (Sep '07 =5.56%, Dec '07 = 4.76%).
Maybe things aren't going to be so bad after all...