Thursday, December 15, 2011

The TED spread rears its ugly head again! So?

Keeping your eye on the TED spread!

A normal question that you may be asking yourself right now might be "what is a TED spread and why should care?"

In the arcane world of Wall Street lingo where one useless or meaningless acronym follows the one before it, given the current 2011 financial crisis in the Eurozone the TED spread is actually something worth keeping an eye on!

The TED spread is one of your global gauges of liquidity risk!

"So once again why do I care about global liquidity risk, especially when I have Christmas shopping to get done?"

Here it is in a nutshell!

Simply put the TED spread gives the viewer an idea and a snapshot of just how willing banks are to engage in overnight lending with each other, a daily event that helps to grease the wheels of economy's and markets in addition to keeping the banks that are borrowing the money up and running!

If the lending bank perceives counterparty risk to its money, it will charge the borrowing bank more for the privilege.

If the borrowing rate gets so high that it is no longer feasible to for borrowing to borrow, things grind to a halt.

This is a scenario, like occurred in 2008, that nobody wants to see again.

TED Spread = 3-month LIBOR minus 3-month U.S. treasury yield

"As a barometer of the "flight to quality" of funds around the world, the TED Spread is a gauge of investor comfort, panic and the willingness of banks to lend money to each other.

The Ted Spread is the difference as quoted in U.S. dollars, between the 3-month treasury bill and the 3-month LIBOR rate.

The value of the TED Spread during "normal" times is typically .10 to .50 basis points (currently .24). In other words if the 3-month treasury was 1.1% then the 3-month LIBOR rate would be anywhere from 1.2% to 1.6% (current 3-month rates are much lower).

During the height of the 2008 financial crisis, the TED Spread grew to as large as 465 basis points!

This meant that using the same hypothetical 1.1% 3-month treasury bill rate, the 3-month LIBOR would have been 5.75%..." (Source)

The 2011 TED spread and 5-year TED spread charts

The charts below show the level of angst reached during the height of the 2008 financial crisis, the period of relative calm and now another rise in the level of angst.

If this spread continues to widen it will simply be one more piece of anecdotal evidence indicating the trouble that the global banking system and by extension the global economy is actually in.

Keep your eye on the TED spread!


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1 comment :

  1. actually currently .55 more than doubled in the past 4 months. the steady increase despite the weekly and daily temperature of the news & markets I think is telling