In this article, we are going to explore TED spread and its impact in different contexts. From its origin to its current evolution, TED spread has been a topic of interest and debate in various areas. We will analyze its importance in contemporary society, its relevance in the academic field and its influence on technological development. Additionally, we will examine how TED spread has shaped people's opinions and attitudes over time and how it continues to be a reference point in today's world. Through this comprehensive analysis, we hope to shed light on TED spread and provide a more complete view of its impact on everyday life.
The TED spread is the difference between the interest rates on interbank loans and on short-term U.S. government debt ("T-bills"). TED is an acronym formed from T-Bill and ED, the ticker symbol for the Eurodollar futures contract.
Initially, the TED spread was the difference between the interest rates for three-month U.S. Treasuries contracts and the three-month Eurodollars contract as represented by the London Interbank Offered Rate (LIBOR). However, since the Chicago Mercantile Exchange dropped T-bill futures after the 1987 crash, the TED spread is now calculated as the difference between the three-month LIBOR and the three-month T-bill interest rate.
The TED spread is an indicator of perceived credit risk in the general economy, since T-bills are considered risk-free while LIBOR reflects the credit risk of lending to commercial banks. An increase in the TED spread is a sign that lenders believe the risk of default on interbank loans (also known as counterparty risk) is increasing. Interbank lenders, therefore, demand a higher rate of interest, or accept lower returns on safe investments such as T-bills. When the risk of bank defaults is considered to be decreasing, the TED spread decreases. Boudt, Paulus, and Rosenthal show that a TED spread above 48 basis points is indicative of economic crisis.
The long-term average of the TED spread has been 30 basis points with a maximum of 50 bps. During 2007, the subprime mortgage crisis ballooned the TED spread to a region of 150–200 bps. On September 17, 2008, the TED spread exceeded 300 bps, breaking the previous record set after the Black Monday crash of 1987. Some higher readings for the spread were due to inability to obtain accurate LIBOR rates in the absence of a liquid unsecured lending market. On October 10, 2008, the TED spread reached another new high of 457 basis points.[citation needed]
In October 2013, due to worries regarding a potential default on US debt, the 1-month TED went negative for the first time since tracking started.