The TED spread is still too high

| 9 September 2008 12:12

You would think that after the biggest bailout in financial history, one could breathe a sigh of relief. However, as I write this post, the markets are getting pummeled, financial stocks in particular. What is clear from the TED spread is that market risk is still high.

The TED in TED spread stands for Treasury Eurodollar. The TED spread measures the gap between the interest rate at which the U.S. Treasury funds itself (3-month T-bills) and the Eurodollar interest rate at which banks lend to each other (3-month LIBOR: London Interbank Offered Rate). When this gap is high, banks are obviously less willing to lend to one another at risk-free rates. This suggests that fear of bank failure is high.

Right now, the TED spread is 1.14%, which is extremely high. Unfortunately, it, therefore, appears that we should expect more market volatility.

Source
TED Spread quote – Bloomberg Market Data

avatar About Edward Harrison

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages, a skill he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.

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2 Comments

  1. avatar MAB says:
    9 September 2008 at 12:37

    You would think that after the biggest bailout in financial history, one could breathe a sigh of relief

    I’m not breathing a sigh of relief. I’m not holding my breath either.

    Price controls NEVER work. Even if the treasury succeeds in putting a floor under house prices, I’m quite certain it will not be a free lunch.

  2. avatar Edward Harrison says:
    10 September 2008 at 08:45

    It won’t be a free lunch, but it will provide liquidity to the market at a minimum. Today will be interesting.