The Ted Spread, or TED Spread, is the difference between two interest rates for a given 3-month period: the interest rate on short-term U.S. government debt, and the interest rates of interbank loans.
TED stands for "Treasury-Euro Dollar." To get your TED Spread, the Treasury part comes from the interest rate on U.S. Treasury bills, and the Euro Dollar part comes from LIBOR.
See: LIBOR for more deets, but the TL;DR is that the London Interbank Offered Rate is the average market rate of what leading banks in London are charging each other for loans, so it’s a market rate, not a government-set rate. The federal funds rate, or fed funds rate, is set by the Federal Open Market Committee, the major committee of the Federal Reserve, the U.S.’s central bank.
The TED spread indicates the severity credit risk in the market. Since the U.S. dollar is the “it girl” currency of the world, U.S. Treasury bills are considered risk-free. Thus, the TED Spread measures the difference between the LIBOR interbank market rate and the risk-free, government-set T-bill rate.
The larger the TED spread, the higher interest rates banks are demanding, reflecting a perceived increase in default risk in the eyes of banks. A lowering TED spread means banks took a chill pill; their risk seems to be decreasing. For instance, the TED spread was sky-high when Lehman Brothers collapsed in 2008, which put the other banks on their guard in terms of interbank lending.
Related or Semi-related Video
Finance: What is Spread?48 Views
finance a la shmoop. what is spread? before we start just no. get your mind
out of the gutter. spread refers to the money value between [100 dollar bill]
a bid and ask price under a market maker structure of trading securities. no more
wire hangers, a plastic hanger company is publicly traded on an exchange like
Nasdaq where buyers bid for a price to purchase and sellers ask for a price to [Nasdaq wall shown]
trade. no more wire hangers is bid this moment at 37:23 a share by buyers
willing to buy right now at that price and is being asked at this moment at a
price of 37.31. note the eight cents a shared difference in the share prices.
that dif is the spread between the two prices, and it's worth noting that in [bread is buttered]
extremely volatile stocks, the spread widens. and in boring highly liquid
stocks which don't move much, the spread tightens or is narrower. that is on a
volatile equivalent of no more wire hangers the spread might grow to 20 or
30 cents a share whereas a boring name that pays a big dividend and the stock
never moves much we're thinking AT&T here, [man snores at a desk]
well that spread might be just three or four cents. so why grow? well because a
market maker in a volatile stock doesn't want to be caught losing money on her
inventory. if no more wire hangers suddenly gapped down to 37.10 a share [equation shown]
well it would be likely less than the average of what the market maker paid
for her quote "inventory" unquote in that stock from which he was making a market
in it. each time the shares trade the market makers dip into that spread to [woman dips cracker in butter]
pay their bills and allow them to keep doing business. so that's spread. and it's
not the type that Prince used to sing about. [man on stage]
Up Next
Spread to treasuries is an indication of risk associated with a given debt or bond offering.