This indicator provides an insight into perceived economic risk, monetary liquidity and credit risk of the global financial banking system. A rising or high TED spread will often precede a downturn in the stock market because it indicates increasing risk of bank defaults and economic instability. A falling or low TED spread indicates low risk of bank defaults and economic instability.
The TED Spread is the difference between the 3 month T-bill rate and the 3 month London Inter Bank Offered Rate (LIBOR).
TED spread = 3 month LIBOR rate - 3 month T-bill interest rate
What is TED?
TED is an acronym formed from T-Bill and ED, the ticker symbol for the Eurodollar futures contract. T-bills are short-term U.S. government debt.
What is LIBOR?
The London Inter Bank Offered Rate (LIBOR) is the average interest rate at which global banks borrow and lend from each other. It’s purpose is to have a benchmark for bank to bank transactions. The index is used widely around the globe to set the interest rate of various variable rate loans.