The TED Spread and What It Means to You

Posted by 12 February, 2009

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You may or may not follow the market. Personally, I try to stay out of the day to day activities partially for my sanity, but also because it doesn’t matter if I look at it or not because we aren’t selling anytime soon. While I try to stay away from all of the “hoopla” mentioned in the news, I do want to be educated so I know what I am doing and have a plan of action. One item that I had heard about previously in news articles, and in a podcast (Plant Money from NPR) I listen to while running, is the TED spread.

The TED spread is the difference between the three-month U.S. Treasury yield and the three-month Libor rate. The Libor rate is the rate at which banks charge each other on the London interbank exchange. NPR and The Big Money have in fact stated that we should be following the TED spread and not the Dow.

So, how do you know what number is good or bad for the Ted Spread?

CNN states that “A jump in the spread shows how panicky banks are, in that they are charging each other a bigger interest-rate premium than money lent to the U.S. government“. This basically means that banks are afraid to lend to one another out of fear that the firm borrowing the money will fail or the firm lending the money might need the money for it’s own crisis.

To give you an idea of what the TED Spread has looked like more recently and in the past, I found a nifty chart via Bloomberg.

Ted--Spread

If you look at the chart above, you’ll notice that the TED Spread typically stays at around 50 points or less, but since late 2007, it’s been a different story. In fact, it’s been more than double over it’s average for over the last year.

For more information on the TED Spread, there are several resources below. The article from Slate, “Now, Dow” and the Vinny Catalano Interview are great resources in understanding the TED Spread.

The current TED Spread trend seems to be going in the right direction. Do you think the economy is on it’s way back?

Photo by: Azrainman

External Resources:

What is the TED Spread?
TED Spread by Investopedia
The TED Spread Alliance by NPR Money
Vinny Catalano on NPR discussing the credit markets, Treasury yields, Libor and the TED Spread
Now, Dow?

Other Posts:

Interview: FairRepair.com
A Sure Fire Non-Money Maker!
What’s the Best Financial Decision You’ve Made?
10 Reasons Why I Want You to Be Financially Independent
529 or an IRA for College Savings


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Categories : Personal Finance,Uncategorized Tags : ,

Comments
February 14, 2009

Interesting read. Its become like a catch22 situation, banks dont lend to each other which means that poor lenders dont get money. I think people are just using different means of judging the market. BAsed on last couple of months its a sidewise market which is unable to make a direction.

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