Note: This post is from April 2008 but is updated from time to time to reflect charts of the current market conditions
The TED spread is a common measure of fear and risk in the capital markets. Judging from where the TED spread is now (see chart below), there’s a lot of fear and risk to go around.
Updated chart for June 2010:
The TED spread measures the gap between the interest rate at which the U.S. Treasury funds itself (3-month T-bills) and the interest rate at which banks lend to each other (3-month LIBOR: London Interbank Offered Rate). And one can see from the Bloomberg chart that risk is rampant in the global capital markets. In fact, it has been increasing since the Bear Stearns debacle.
On the other hand, last week, the U.S. stock market rallied as if everything was hunky dory. However, continued bank write-offs, bank capital raising, and the huge TED spread suggest quite the opposite.
If you are in the markets right now, be forewarned: risks are increasing now, not decreasing.
Update: I just caught an article on Bloomberg entitled, “Libor to Rise as Banks Stay Wary, Derivatives Signal,” suggesting that the Libor-OIS spread is sending the same signal about market weakness and risk. Beware.
TED Spread – Bloomberg