Seeking Alpha
Profile| Send Message|
( followers)  

During the financial crisis, the TED Spread received a lot of attention. Officially, the TED Spread is the interest rate difference between the U.S. Treasury bills and the eurodollar market.

In short, it’s the risk premium that lenders demand in the short-term credit market. The TED spread was followed closely because it’s a good measure of the health of credit.

In normal times, the TED Spread is usually around 20 and 50 (meaning, 0.2% to 0.5%). But during the height of the financial crisis, the TED Spread jumped to 465.

As the TED Spread started to ease up, the stock market took off. I wanted to see what the relationship between the two was. I got all of the data from 1992 through a few days ago. I re-sorted the day’s stock gain by rising TED Spread, and separated the data in 10 deciles.

Here are my results. To read the table, the Wilshire 5000 lost a total 21.32% whenever the TED Spread was below 0.09. Since I used deciles and a 20-year period, each line represents about two years time.

High End of Range Low End of Range Stock Market Gain
Under 0.09 -21.32%
0.14 0.09 54.89%
0.19 0.14 0.30%
0.24 0.19 40.01%
0.28 0.24 28.07%
0.34 0.28 21.57%
0.41 0.34 24.76%
0.50 0.41 2.98%
0.94 0.5 42.28%
Over 0.94 -0.92%

I’m not surprised that a high TED Spread is bad for the market, but I didn’t expect that a low reading would be even worse. The current reading is at 0.1995.

Source: The TED Spread and Equity Returns