November 6, 2008 by admin
TED Spread
The TED spread, or treasury euro-dollar spread, measures the difference between the 3 month US treasury bill and the 3 month LIBOR. Remember, LIBOR measures the risk of lending to corporate borrowers while the treasury bill yield is a risk free rate of return. The TED spread, expressed in terms of basis points, reflects the risk premium that the market has assigned to corporate lending. It is said that the higher the TED spread, the higher the risk of failures in the market.
The TED spread measures the perception of fear. Historically, it stays around .5%; however, during times of crisis, it can shoot much higher. Take a look at the TED spread during the credit crisis of 2007/2008. It went up to a unheralded level of nearly 450 basis points. The fear in the market was pricing in financial armageddon.
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