Understanding the TED Spread

Over the last several days you may have noticed an unfamiliar term making its way into financial conversations, namely the TED Spread. The TED spread measures the difference between the three month US Treasury Bill and the three month Eurodollar Future. Elevated readings in the indicator indicate an increased level of risk aversion in the market, as investors flock to short term T-bills which due to their credit quality and short time horizon are considered risk free, while Eurodollar futures are more representative of the credit quality of corporate borrowers.

Below we show the history of the TED Spread dating back to 1986, along with how the market performed following similar spikes to the current one. As the results illustrate, the S&P 500's performance following extreme readings are mixed. In three out of four of the period where the TED spread spiked, the market was higher three months later. However, the one time it had a negative return was in 1987 when the market crashed.

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Comments

[Alpha&Omega:]

Is there a site online that would provide the TED spread for a given period of time - or even real time, or must this be manually calculated? If calculated, how would you suggest doing so?

2008 Aug 19 12:41 AM

[User 267565:]

You can get quotes and graphs of the TED spread from Bloomberg. www.bloomberg.com/apps...

2008 Sep 23 01:11 AM

[Rocknbob:]

Question: Why do borrowing eurodollars (futures) have to do necessarily with corporate borrowing?

2008 Oct 16 03:47 PM

[Ganaraska:]

Rocknbob: They are related but they are not directly connected. By looking at the relative popularity of these 2 investments, it is possible to get some insight into what lenders or investors are thinking.

Apr 03 05:21 PM