SignalFrogWhen Lehman Brothers filed for bankruptcy on September 15, 2008, most investors experienced it as a bolt from the blue. Equity indices had stood near record highs only a year before, unemployment was low, and the news spoke of a housing crisis, not the end of an investment bank. Anyone watching credit markets saw the warning much earlier. Just not in a form that made the front page.
What the interbank market already showed in the summer of 2007
The TED spread measures the gap between the rate banks charge each other for short-term borrowing and the rate on comparably dated, safe US government debt. In calm periods it sits in the low double digits of basis points; banks trust each other almost as much as they trust the state. In August 2007, when the French bank BNP Paribas froze three of its funds over dried-up US mortgage markets, it began to climb. By its peak in October 2008 it reached just under 460 basis points, nearly ten times the normal level. A year before Lehman fell, banks already distrusted each other by a measurable margin.
What the bond market already knew
The risk premium on high-yield bonds over government debt, the credit spread, still traded in its usual range of around 260 basis points in 2007. By the end of 2008 it stood above 2,000 basis points. Equity markets stayed near record highs into the autumn of 2007; this measure started moving much earlier. The reason lies in a simple asymmetry: bondholders lose everything in a default and gain, at best, only their coupon. That caution shows up in the price long before it shows up in the headlines.
Why hardly anyone was watching
The TED spread and credit spreads appear in no daily newspaper and no standard portfolio summary. Using them as a warning meant knowing they existed and then tracking them daily, a demand hard to meet alongside a job and a life. That is exactly the gap our methodology closes: credit stress is one of several layers BoilingFrog tracks continuously, so the warning arrives before it is already history.