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What the TED spread shows about the economic mess

Staff Report • Oct 11, 2008 at 12:00 AM

If you want to broaden your personal check of the economic situation add the TED spread to the Dow, NASDAQ and S&P rates. Hmmmm, you could drop the Dow since it's not a very good indicator of the overall situation on Wall Street, but that's another story. The TED spread is an indicator of perceived credit risk. It's call TED because the first letter of the acronym stands to T-bill. ED stands for Euro Dollars, but the spread doesn't use Euro Dollars anymore. TED used to be based on 3-month U.S. Treasury futures compared to 3-month Eurodoallars contracts. But that was changed when the Chicago Mercantile Exchange dropped T-bill futures. Are you still with me? Currently the TED spread is a calculation of the difference between the three-month T-bill interest rate and three-month LIBOR. T-bills are generally considered risk-free and the LIBOR reflects the credit risk of lending to commercial banks. When the TED spread increases, it's a sign that lenders think the risk of default on inter-bank loans is increasing. That means the Inter-bank lenders demand a higher interest rate, or accept lower returns on safe investments such as T-bills. When the risk of banks defaults is considered to be decreasing, the TED spread decreases. You can see the current TED spread by CLICKING HERE.

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