An interesting backdrop to the recent rally in equity markets has been a somewhat persistent rise in some indicators of risk in the market that give us pause. Looking at the TED spread, or the spread between the 3 Month T-bill and 3 Month Libor we see that it currently stands at just under 40bps, this is its highest level since QE2 was announced last fall.
The TED spread is generally an indicator of credit risk in the broader market place and is widely viewed as a precursor to a stock market downturn. We have seen a few other data points that reinforce our view that the current rally may be waning including, credit spreads on both investment grade and high yield bonds widening. We have largely positioned our portfolio to take advantage of this market view using ETFs while at the same time looking for opportunities to add alpha via individual security selection. In addition we have taken a bullish stance on the Dollar relative to Euro as we believe that the trends above will continue the flight to safety trade into the Dollar.
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