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  • TED Spread: How High Is Financial Risk Today?

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08 Oct 2008

TED Spread: How High Is Financial Risk Today?

  • By Bill Conerly
  • In Uncategorized
  • 6 comments

The market's fear is reflected in the TED spread, a cute, cuddly name given to the difference in interest rates between inter-bank loans (LIBOR) and U.S. treasury bills.  We use 3 month maturities on both to keep things apples-to-apples.  The spread has shot up during the financial crisis, but I wanted to put this into some perspective:
TED

Yes, this is a crisis.  About as bad as September 1987 when the stock market crashed, but not nearly as bad as the recessions of the early 1980s, or mid 1970s, or 1970.

What I see in this chart is the Great Moderation, the milder business cycle climate that I discussed in two interviews with Mark Thoma.

So, take heart if you survived any of those past recessions.  You'll likely survive this one, too.

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Bill Conerly

    Comments

  1. Rodney
    October 9, 2008

    According to Wikipedia, “BBA LIBOR fixings did not commence officially before 1 January 1986, although before that some rates have been fixed for a trial period commencing in December 1984.”
    So how exactly are you constructing the TED spread prior to this date?

  2. tom desrosier
    October 9, 2008

    Thanks.
    You’re about the only guy whose got a little optimism.
    And that’s important.
    Tom Desrosier
    http://www.dare2believe.com

  3. William Conerly
    October 9, 2008

    Rodney, I downloaded LIBOR data from http://www.FreeLunch.com. They cite “daily press” as their source. Perhaps the basic data were being published before the BBA got involved. That raises the question of data comparability, but I’d guess if one looked only at broad trends that’s not a problem.

  4. ckt (msia)
    October 21, 2008

    It’s too early to call.
    At least let the line finish drawing, maybe we’ll see the worst spread in the history.
    Of course, we all will survive through this crisis, physically speaking.
    But monetary?

  5. D
    October 21, 2008

    In response to the earlier comment about the ted spreads before 1986, I found a 1992 article talking about ted spreads before that time.
    In the article, the writer comments,
    “Since 1974, he notes, peaks in the
    spread have gotten ever smaller.”
    http://www.iht.com/articles/1992/06/06/mrte.php
    So one can infer that the ted spread had been used and watched for quite some time before that.
    Unfortunately, the article doesn’t say when ted spreads first became an indicator for credit tightness and laxity
    Happy Reading!

  6. Immigration Advice
    December 16, 2008

    Hey, nice job on the blog here. Some good ideas. Keep up the good work.

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