Monday, July 12, 2010
The TED Spread: A Look At Financial Stress
The TED spread is the spread between the interest rates on interbank loans and short-term U.S. government debt. A rising TED spread is usually a precursor of a declining stock market because it means liquidity is being withdrawn. It is considered an indicator of perceived credit risk in the economy. When the TED spread increases it is a sign that lenders believe that the risk of default on interbank loans is increasing. This spread is also one of the components that make up the St. Louis Fed's Financial Stress index. The TED spread has been elevated upward since hitting a low back in March, indicating that perceived default risk is slowly increasing. This can be due to a host of issues ranging from Europe's fiscal woes to the recent onslaught of generally poor economic indicators. The spread can be observed via Bloomberg.