TED Spread

Today I read a case study on the events leading up to the Lehman Brothers bankruptcy. The case cited the record level of the TED Spread at that time as a measure of interbank credit risk. So what is it – and is it still relevant?

  • TED Spread = 3 month Libor (interbank lending) less 3 month T-bill rate (US Gov)
  • Indicative of credit risk and perceived health of the banking system
  • Values consistently above 50bps are relatively high (reached 4.5% after Lehman)
  • The spread has trended gradually higher throughout 2016 (now above 50bps)
  • WSJ article cites impact of new money market fund regulations as a factor
  • The spread still remains a relevant indicator of interbank liquidity and risk

Sources and links for reference:

http://lexicon.ft.com/Term?term=Ted-spread

https://fred.stlouisfed.org/series/TEDRATE

http://www.wsj.com/articles/the-ted-spread-is-dead-baby-the-ted-spread-is-dead-1474571091

http://www.telegraph.co.uk/business/2016/10/30/economic-stress-as-world-runs-out-of-dollars/

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