TED Spread

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By Financial Sense: By Cris Sheridan Last month I argued that there was "Still No Sign of a Bear Market" with four charts displaying the following: Strong upward trend in leading economic data Low probability of recession Low...
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By Bob Mcteer: Yesterday, I attended an excellent conference on monetary policy at the Bush Library-Bush 43 that is. While all the participants were excellent, the big draw was former Chairman, Ben Bernanke, in the flesh. Chairman Bernanke...
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NPR  Jul 9  Comment 
Once seen as a useful gauge of risk in the banking system, the measure has been tainted by concerns that banks were manipulating a key part of it.
Investment Postcards from Cape Town  Jan 9  Comment 
As shown in this post, the movement in the European LIBOR-OIS spread over the past few weeks is similar to the European TED spread and indicates that confidence in interbank lending has started improving, but the European LIBOR-OIS spread needs to...




 
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The chart at left shows the value of the TED Spread in basis points, calculated as the 3 Month LIBOR rate minus the 3 Month T Bill rate.

The TED spread is a gap between two interest rates, which is used as a marker of the financial strength of banks.

The TED, or Treasury Eurodollar, spread is calculated by subtracting the interest rate on treasury bills from the three-month dollar LIBOR.

The treasury bill rate is the interest rate paid by the U.S. treasury - often used to represent "risk-free" lending (on the assumption that U.S. government is always good for it), while the LIBOR is the rate at which banks lend to each other. Therefore, the difference in the two rates represents the "risk premium" of lending to a bank instead of to the U.S. government. At its lowest, the TED spread can be as low as 20 basis points, as it was in early 2007.[1] A TED spread this low occurs when banks are seen as strong and in good financial health; the risk of default or banktruptcy is low, and therefore other banks are willing to lend them money at nearly the risk-free interest rates paid by the U.S. government. By contrast, the Ted spread stood at 330 basis points in early October 2008, after a series of bankruptcies by banks and other financial insitutions that occured as part of the 2008 Financial Crisis. On October 10th, the TED spread hit a new record of 460 basis points, reflecting a breakdown in interbank lending.

Looking at TED Spread

on Reuters 3000 Xtra: TED

on Bloomberg Terminal : .TEDSP <INDEX> <GO>

on Bloomberg Website : [1] .TEDSP:IND

References

  1. The Economist - When Banks Find it Hard to Borrow, so do the Rest of us, Oct 2, 2008
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