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One of the most popular barometers for credit distress among money managers has fallen to July 2007 levels, a sign that one of the underlying triggers of the bear market has dissipated.

The gap between the 3-month Treasury bill rate and 3-month Libor, known as the TED spread, fell to 48 basis points Thursday — down from more than 450 basis points at the peak of credit panic in October and near its long-term average of about 50 basis points. (One basis point is one one-hundredth of a percentage point.)

"Over history, it’s been quite an interesting predictor of credit crunches. The fact that it’s gone down is a positive indicator of credit availability," said James Holtzman, a financial adviser at Legend Financial, a Pittsburgh wealth manager that manages $350 million.

The TED spread is used as a measure of basic borrowing costs, since it reflects the difference between the risk-free Treasury rate (the "T" in TED) and the London Interbank Offered Rate. That’s the rate at which banks say they’re willing to lend to each other, and is represented by the "ED" in the acronym. ED is the ticker symbol for the eurodollar futures contract, which reflects market forecasts for Libor. (…)

"The TED spread would be one indicator of the unwinding of the fear trade or flight to safety trade," said Michael Cuggino, president and portfolio manager of the Permanent Portfolio Fund (PRPFX 33.86, -0.18, -0.53%). Investors, he reported, are reallocating assets out of safer and lower-yielding Treasurys into other asset classes. (…)

Another popular gauge of credit risk — the CBOE’s Volatility Index, or VIX(VIX 31.35, +2.32, +7.99%) — earlier this week sank to levels last seen in early September, just days before Lehman failed. See related story. (…)

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