reluctantQuant

Farewell, TED Spread… See You Again, Soon?

Ah, TED's an old and close friend of mine, always love seeing him in the news.
1. no, TED's always a positive guy, unless your government actually colapses.

2. TED directly shows the short term "psychotic factor" of the big bank treasurers. If they're happy, liquid and credit worthy, they offer LIBOR at comfy low levels, relative to Treasuries, while if they're starting to feel "horror show" inklings about deposits, borrowing and counterparty risk, they tighten up their offered lending levels (NCNB - No Cash for No Body). This is more important because it drives up the internal pool rate within the bank itself, increasing the hurdle rate for adding new assets (like making a long term loan).

3. At the end of the day, if the bank treasurer starts getting psycho, then everyone else around the bank has to get psycho, too, because it hits them in the wallet. That's why TED matters so much - it tells you what's going on with the cat who controls the cash.

4. For those who do care about the definitions, TED used to be the spread between the ED eurodollar futures and the T treasury bill futures, and not to be confused with any currency called EUR. But now, since the Tbill doesn't really trade anymore, TED is typically the difference between 3 month LIBOR and 3 month T-bills. This is also considered the "first stairstep" in the credit ladder and is very much a building block in interest rate swap spreads over longer terms. You'll also see TED's cousin a lot, Miss OIS. Some think she's much better looking and a bit more articulate than TED, but that's for another conversation.

Good article.
--rq