What is a TED Spread?
Frank Holmes at US Global Investors explains what the TED spread is . Historically it wasn’t a very interesting parameter because it didn’t change much, however we are living in interesting times. Frank summarizes it nicely below. Graph from Wikipedia The TED spread is the difference between the interest rate that banks charge each other for short-term loans in the London money market (the 3-month LIBOR ) and the interest rate of the 3-month Treasury bill . When the TED spread widens, it means the market sees a rising risk that banks won’t be able to repay their loans. Click here to to see a current TED Spread graph.
TED spreads are the difference in the spread between the purchase and sale of a United States Treasury bill futures contract and a Eurodollar futures contract. The TED spread focuses on the amount of yield that results from the combination of a purchase and a sale of the two different contracts. Along with being a potentially wise investment move, the TED spread can also serve as an indicator of credit risk. When first developed, the idea of the TED spread involved calculating the difference between the interest rates in place for a three month Eurodollars futures contract and a US Treasury bills futures contract of the same duration. The LIBOR, or London Inter Bank Offered Rate, served as the medium for making the comparison between the Treasury bills and the Eurodollar bills. Over time, the LIBOR has become more instrumental in understanding the yield of the TED spread, owing to the fact that the Chicago Mercantile Exchange choose to remove T-bill futures from the Exchange. Understan
