Today's LIBOR Rates
| 1M | 0.22844 |  |
| 3M | 0.24969 |  |
| 6M | 0.38500 | |
| 1Y | 0.83750 | |
Average 30 Year Fixed Jumbo: 5.66% |
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What TED Said
The spread between LIBOR and T-Bills tells us much about the market
January 31, 2009
A lot of people are keeping tabs on TED these days. No, not Ted Danson or Ted Nugent (LIBORATED realizes it just aged itself by citing such venerable celebrities). TED isn’t a “who;” it’s a “what,” the spread between 3-month T-bill interest rates and 3-month LIBOR, the British Bankers’ Association average of interbank lending rates. The difference between these two indices on the same business day is the TED spread, and the size of the gulf tells us much about the mentality of the market.
TED gets its name from T-bill and ED, the Eurodollar futures contract ticker symbol. The T-bill rate forms the baseline of the spread. Treasuries are considered the safest investment available, a marketable security issued by the United States Government and backed by its good faith and solidity. The 3-month LIBOR’s proximity to the rate for this safest of financial instruments tells us how secure contributor banks feel about interbank lending.
Nobel Prize-winning economist and columnist Paul Krugman says of the TED spread, “It’s a measure of financial jitters. If banks believe that their peers are solid, they should be willing to lend each other money on almost the same terms as money lent to Uncle Sam. When they start demanding a big interest rate premium, that’s a sign of fear.”
As Krugman explains, the TED spread is a risk barometer, comparing the always-safe T-bill to the usually safe interbank loans. A narrow TED spread, where 3-month LIBOR rates are close to 3-month T-bill rates, denotes a confident market, since interbank lending tends toward the “safe bet” end of the financial spectrum. When the TED spread widens, it means that banks see greater risk in lending to other banks and are jacking up rates to justify the proposition. Contributing to a wider spread is the “flight to safety” as nervous investors flock to T-bills, driving down their rates in what becomes a seller’s market for the securities.
Historically, the TED spread has ranged between 30 to 50 basis points, or 0.3 to 0.5%. Financial crises have blown the spread wide open, such as the 1987 stock market crash which precipitated a record TED spread. That record was broken during the financial crisis of 2008 with a new high of 465 basis points. As the markets calmed and looked for new solutions from the incoming Obama administration, the TED spread contracted. At the beginning of 2009, 100 basis points is now considered the “magic number.” Market watchers say that spreads below this mark bespeak relative tranquility, while spreads exceeding 100 points reveal Krugman’s “jitters.”