Putting The TED Spread Into Perspective

Here is how to spook people...

TED spread are rising fast, so run for the hills!

Chart of the 6 month TED Spread courtesy of Bloomberg

The TED spread, according to wikipedia.org, is the difference between the interest rates on interbank loans and short-term U.S. government debt ("T-bills"). TED is an acronym formed from T-Bill and ED, the ticker symbol for the Eurodollar futures contract.

More from wikipedia.org

``Initially, the TED spread was the difference between the interest rates for three-month U.S. Treasuries contracts and the three-month Eurodollars contract as represented by the London Interbank Offered Rate (LIBOR). However, since the Chicago Mercantile Exchange dropped T-bill futures, the TED spread is now calculated as the difference between the three-month T-bill interest rate and three-month LIBOR...

``A rising TED spread often presages a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn."


Yet seen from a 5-year period, the perspective dramatically changes.

Thus, it has not been established yet whether the TED spread will reach a panic mode or hit extraordinary levels seen in 2008.

At present, rising TED spreads remain at pre-2008 Bear Sterns-Lehman levels (blue horizontal line) and have not encroached into panic territory.

Besides, there was much volatility during the pre-2008 as evidenced by the undulations. However, much of these gyrations had been muted until the unraveling of the concealed impairments seen in major US investment banks.

In addition, there are stark differences in 2008 and current conditions. For instance, then, policymakers dithered on how to intervene, today, they are quick to resolve any signs of volatility with a "shock and awe" 'throw money at the problem' approach. Example, today, Bank of Japan declared a new lending window to the tune of 3 trillion yen ($32.8 billion).

Importantly, the TED Spread isn't the only 'magical' indicator that determines conditions of the credit markets aside from the supposed spillover effects to the stock markets.

Therefore, I'd be leery of any analysis using the TED Spread to "spread gloom". That's because such insight seem to be misrepresenting the facts for a desired (biased) outlook. I call this "cart before the horse" reasoning.