The Ted Spread

Ken AshfordElection 2008Leave a Comment


The TED spread is the difference between the interest rates on inter-bank loans and short-term U.S. government debt ("T-bills").

The TED spread is an indicator of perceived credit risk in the general economy. This is because T-bills are considered risk-free while LIBOR reflects the credit risk of lending to commercial banks. When the TED spread increases, that is a sign that lenders believe the risk of default on inter-bank loans (also known as counterparty risk) is increasing. Inter-bank lenders therefore demand a higher rate of interest, or accept lower returns on safe investments such as T-bills. When the risk of bank defaults is considered to be decreasing, the TED spread decreases.

Another way to put it…. the TED spread shows the amount of fear in the markets.

Today, the TED spread reached another new high of 435 basis points from a long term average of 30 basis points.