The TED spread is still too high


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You would think that after the biggest bailout in financial history, one could breathe a sigh of relief. However, as I write this post, the markets are getting pummeled, financial stocks in particular. What is clear from the TED spread is that market risk is still high.

The TED in TED spread stands for Treasury Eurodollar. The TED spread measures the gap between the interest rate at which the U.S. Treasury funds itself (3-month T-bills) and the Eurodollar interest rate at which banks lend to each other (3-month LIBOR: London Interbank Offered Rate). When this gap is high, banks are obviously less willing to lend to one another at risk-free rates. This suggests that fear of bank failure is high.

Right now, the TED spread is 1.14%, which is extremely high. Unfortunately, it, therefore, appears that we should expect more market volatility.

TED Spread quote – Bloomberg Market Data

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