TED Spread

Why should I care about the TED spread?

The TED spread is important because it provides clues about the health of the credit markets and, by extension, the overall economy. The TED spread is the difference between the interest rate on three-month Treasury bills and the rate banks charge each other for three-month loans (as measured by the London Interbank Offer Rate, or LIBOR). The name comes from T-Bill and ED, the ticker symbol for the Eurodollar futures contract. The spread captures how banks feel about the financial system, and that can have crucial ramifications on your ability to borrow, as well as for the overall economy.

In good times, banks lend to each other constantly, helping money flow to businesses and consumers. Bankers ordinarily figure there’s almost no risk to this, so they charge other banks just a tad more than the going rate for T-bills. But when bankers become worried, they may demand higher rates. Credit dries up, and the economy suffers as businesses have trouble getting funding to expand and consumers can’t borrow to buy homes or make other big purchases.

In October of 2008, the TED spread spiked to its highest level ever. It has fallen considerably since then, but remains elevated. A return to normal levels will be critical for an economic recovery.