What is the TED Spread?
The TED Spread is defined as the yield difference between the [risk-free rate] United States three month Treasury Bill and the three month London Interbank Offered Rate [LIBOR]. What does it mean? The TED spread is a way of taking the pulse of global credit risk. The three month T-Bill is considered ‘risk-free’ because of the full faith and credit backing of the US Government (i.e. no default risk). To compare that to the LIBOR reflects the credit risk of unsecured lending between banks in the London interbank market. In a nutshell, a rising TED spread indicates what we have now- fear of the default risk. Low spreads indicate more of an appetite/tolerance for risk in a ‘safe’ economy. What other data supports the TED Spread? Many economists argue that the LIBOR-OIS spread is the complement to the TED spread. The LIBOR-OIS spread measures the difference between LIBOR and the overnight index swap rate. The rate has been viewed as confirming the credit risk by “measuring the availability
