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TED Spread

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A TED spread is a yield spread. On any given day, the TED spread represents the difference between the interest rate of a three-month US Treasury Bill (i.e. "T" in TED spread) and the settlement value of a three-month Eurodollar future (i.e. "ED" in TED spread). TED spread is simply calculated as the difference between the three-month US Treasury Bill and three-month LIBOR (i.e. London Inter Bank Offered Rate). A spiking TED spread suggests increasing counterparty risk in the financial markets. When inter-bank lenders are concerned about potential defaults by other banks, the LIBOR increases causing the TED spread to increase as well. For example, during the banking crisis in 2008, the TED spread shot up to more than 450 basis points. Prior to the crisis, the TED spread tended to stay between 20 to 60 basis points. The TED spread is expressed in basis points (i.e. bps). A TED spread of 100 basis points for example means that there is a 1% difference between the three-month T-Bill and three-month LIBOR.

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