TLee

Crocodile Tears and the LIBOR-OIS Spread

The LOIS Spread (3 Month Libor-OIS) can be tracked on Bloomberg: www.bloomberg.com/apps...

LOIS is better than TED because it measures both credit AND liquidity risk (TED measures only credit risk). Both OIS and Libor are interbank rates. However, OIS is the expected, average daily fed funds rate for, say, the next 3 Months. In an environment where liqudity is preferred, there is a premium to lock in funding for 3 months (3M Libor) versus rolling over the borrowing one day at a time (fed funds.) There is also credit risk, as measured by lending for 3 months at a time (3 Month Libor) versus lending for one day at a time, and then, lending only Fed reserves (Fed funds, OIS)