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TED Spread: Going Where No Spread Has Gone Before at Trader’s Narrative





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The TED spread is one of the most basic gauges of fear in the financial markets. TED stands for Treasury Eurodollar because originally it was calculated by taking the US 3 month treasury bill and subtracting it by the 3 month Eurodollar contract rate. Today the spread is calculated by taking the difference between the 3 month US T-bill rate and the 3 month LIBOR rate.

This is an important indicator because while US government issued fixed income is perceived to be “risk free” (or as close as you can theoretically get), LIBOR rates are commercial lending rates and are not. So therefore, the difference of the two isolates counterparty or default risk in the market at any point in time.

Of course, this is a generalized measure of counterparty risk across the financial markets and is not reflective of individual corporate bonds. Think of it as being a measure of credit risk the same way that the VIX is a measure of volatility. I can guarantee that it is one of the ingredients in the “Panic Button” indicator from SentimenTrader. That indicator by the way, has now shrunk back to less than 1 standard deviation away from its mean.

Right now the TED spread is showing enormous stress in the global financial markets:

TED spread september 2008.png

Today it closed at 313 basis points which means that we have broken through the previous record set at the darkest hour of the 1987 “Black Monday” stock market crash (300 basis points). Ponder that for a second.

On the other side of things, in the summer of 2000 (remember those days?) the TED spread shrank to almost nil as everything was well with the world and everyone held hands singing songs of monetary bliss while basking in the sunshine of the “Goldilocks economy”.

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7 Responses to “TED Spread: Going Where No Spread Has Gone Before”  

  1. 1 jock

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    I’d be interested to know how quickly the TED has returned to normalcy after previous periods of high credit risk. Also, can factors be identified which make this happen?

  2. 2 Gary

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    holy mother of god… this is insane. what is the symbol for this on bloomberg?

  3. 3 Babak

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    Gary, you can find it here - it has already come down to 2.33

  4. 4 JB

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    Babak Am I to understand that this is not The bootom yet?

  5. 5 FB

    Deprecated: preg_replace(): The /e modifier is deprecated, use preg_replace_callback instead in /home/traders/public_html/wp-includes/functions-formatting.php on line 76

    Please could you provide me the bloomberg symbol for this. Thanks

  6. 6 Babak

    Deprecated: preg_replace(): The /e modifier is deprecated, use preg_replace_callback instead in /home/traders/public_html/wp-includes/functions-formatting.php on line 76

    FB, Gary asked (see above) the same thing. The link is up there, check it out.

  7. 7 Vincent Huang

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    LIBOR OIS & TED spreads ended the week down 21% and 27%

    CP Yields on 90day paper increased to 4.9% on Firday, posting a 14% decrease for the week

    5 year spreads on A-rated corporate bond increasing 4.9% and B-rated bonds increased 3.7% for the week.

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