Loading ...This is the difference between the interest rate at which the US Government is able to borrow on a three month period (T-bill) and the rate at which banks lend to each other money on a three month period (measured by the Libor).
Since, arguably, the risk of a bank defaulting is slightly higher than that of the US government defaulting, the Ted spread measures the estimated risks that banks pose on each other. The higher the perceived risk that one or several banks may have liquidity or solvency problems, the higher the rate you will ask from your loans to other banks compared to your loans to the government.
Consequently, the Ted spread is a great indicator of interbank credit risk and the perceived health of the banking system.
see my 11:59 post
DEFINITION of ‘Ted Spread’
The price difference between three-month futures contracts for U.S. Treasuries and three-month contracts for Eurodollars having identical expiration months.
INVESTOPEDIA EXPLAINS’Ted Spread’
The Ted spread can be used as an indicator of credit risk. This is because U.S. T-bills are considered risk free while the rate associated with the Eurodollar futures is thought to reflect the credit ratings of corporate borrowers. As the Ted spread increases, default risk is considered to be increasing, and investors will have a preference for safe investments. As the spread decreases, the default risk is considered to be decreasing.