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Thread: Chart of the week - the TED Spread revisited

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    Default Chart of the week - the TED Spread revisited

    commentary from a few months back ...

    (snip)"The TED Spread, because it reflects stress (or not) in credit flows in THE reserve currency and in the world’s largest economy, is an indicator of world financial and economic health. I put it in those terms because as we have seen large moves in the TED spread impact other financial markets and can be an indicator of economic health.

    The Ted Spread is the interest rate differential between the 3 month London Interbank Offered rate (LIBOR) in US dollars and the 3 month US T-Bill rate. Of course there are other terms such as, a 6 month LIBOR and a 6 month T-Bill. So one could talk about a 6 month TED spread. But typically, when talking TED spreads, one is talking the 3 month spread. TED stands for Treasury Bill and Euro-dollar or LIBOR in US dollars.

    An investment in US T-Bills is considered risk free. While an investment in a large bank may not normally appear to carry a great deal of risk, there is always a yield greater than a US T-Bill investment. Typically, the TED spread is between 10 and 50 basis points. An increasing spread, particularly over the “norm” is an indication of an increasing reluctance on the part of banks to lend to one another due to greater perceived credit risk.

    Note in the graph how volatile the TED spread has been over the last 3 years. During the financial crisis in 2008, in the aftermath of the Lehman (LEHMQ.PK) bankruptcy, it hit a record spread of 465 basis points. That magnitude of spread indicated a virtual shut down in interbank lending. And if the large world banks are reluctant to lend to one another, how reluctant will they be in placing new commercial loans?"(snip)

    now check out today's TED spread update ...



    Yes, that's right, today's closing TED spread value of 46.8 is significantly higher than the value of 15 it had when this article was written a few months ago. Also, the TED spread value has risen very sharply in the past couple of weeks despite European and US gov't stabilization efforts ( i.e. bailouts and currency market interventions ).

    ~
    Last edited by Melonie; 06-11-2010 at 10:24 PM.

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    Default Re: Chart of the week - the TED Spread revisited

    I'll also throw in this new wrinkle ...



    with this new commentary from ...

    (snip)"As the chart below illustrates, for the first time this year, the TED Spread has begun to trade in correlation with the VIX [ the US stock market volatility index - sic], indicating risk has spread from the equities market into the intra-bank lending market, which could have significant repercussions."(snip)

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