The Ted Spread - From 0.4 Up To 4.6 And Down Finally To < 1 - What Does It Mean? We Were F*&ked

We were staring into Great Depression II. Now, things are still bad, but not quite Great Depression II.

What does it all mean? Here is Paul Krugman discussing the significance of the Ted Spread back in April 2008. Of course, after Krugman posted this, a few months later, credit markets really went all to hell as the graph below shows.

http://krugman.blogs.nytimes.com/2008/04/17/its-my-ted-mine/

/snip

Seriously (very, very wonkish), I started looking at the TED spread last fall, out of frustration with news reports that compared 3-month LIBOR with the Fed funds rate; it seemed obvious to me that those comparisons were understating the true spread, because the Fed funds rate is daily and LIBOR was, at minimum, taking into account expected future Fed funds cuts.

I got to ask Fed officials about that, and was told that they preferred the OIS spread, based on Fed funds futures prices. They didn’t like the Ted spread, they said, because they thought liquidity issues distorted Treasury rates.

But I gradually became convinced that those liquidity issues were actually at the heart of the story. Basically, even Fed funds suffers from fear of bank defaults: it’s an unsecured loan, just like LIBOR. So the comparison between 3-month Treasuries and LIBOR is telling you how much of an interest rate loss investors are willing to accept in return for something that’s really, truly safe.*

So I’ve focused on the TED spread for a while, and I think other people have picked it up from me.

/snip

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So, where do things stand today? We are at 096, which ain't great, but it is 4.33, which meant no one was lending squat to anyone. It really did mean what President Obama the candidate was talking about during the campaign, and now, that the economy grinds to a halt. Things areb't great now, but in that fourth quater of 2008 under George Bush, the credit markets pretty much came to a stand still.

http://www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP%3AIND

maker exposure has been somewhat discovered. Banks never really quit lending, but the securitization market is gone, ne'er to return for a long time.

So, the TED, Eurodollar, LIBOR, etc. just aren't relevant to the consumer anymore. They still can't buy a new washing machine without an 850 credit score. A fundamental shift occurred, and the average person can't use previous metrics to gauge the overall situation anymore.

I have more metrics if you like, but we aren't digging out of any hole, it may be shallower, but widening exponentially.

Sorry to rain on your parade.

Whoever is quoting you an 850 credit score should be fired. Even now, the average credit score for a used car buyer is 650. So, shop around, and good luck with your washing machine purchase, because an 850 credit score requirement just sounds unrealistic from wherever you happen to be shopping.

Good luck!

The real issue is that the reduced TED spread continues to have a minimal effect on our larger economic picture. That's because this isn't merely a liquidity crisis, it's a solvency crisis.

Trying to use graphs and charts and logic and reason will not get us to what is really happening.

The problem with that kind of economics is that it lies in the heads of economists. I've studied economics through grad school where I studied global economics. If you want good grades memorize the graphs and charts, know what way the lines will move with each and ever possible scenario and do that on the exams. Then when you get out into the real world forget you ever heard of any of it.

The biggest determinate of which direction the economy will go is the expectations of consumers.

I am a freelancer (meaning that I work for myself basically and don't have what any financial institution would consider to be an income. I literally legally have to list my yearly income on credit applications as $0, even though I make close to $40k/year.) with a poor (sub-600) credit score, 250% of my personal worth in debt and I have lenders falling all over themselves to lend me money at reasonable interest rates (<12% credit cards, mortgages at rates that I'd never seen two years ago, etc.)

The only difference for me has been that the size of the loan I can get has decreased because the lenders have less $ on hand to lend.

I just love all the smartie pants on the DU who can answer such things and explain it to those of us unfamiliar with the topic.... :hi:

If you have some money to lend out, you can always buy U.S. Treasury bills and be certain you'll be repaid. Alternatively, you can lend it to some big bank, and be very confident -- though not certain -- that you'll be repaid. Because there's more risk in the latter approach, you expect to be paid a higher interest rate by the bank than by the U.S. Treasury.

The TED Spread measures how much higher. In other words, how much more do the banks have to pay to attract money? If the perceived risk of default is small, then the spread will be small. As the perceived risk of default increases, more and more investors will choose to play safe and buy Treasury Bills instead, so the banks needing money will have to offer a higher and higher premium over the T-Bills.

The specific measure that's used for the TED Spread is to compare two numbers: the interest rates for three-month U.S. Treasuries contracts and for the three-month London Interbank Offered Rate (LIBOR).

From :

The size of the spread is usually denominated in basis points (bps). For example, if the T-bill rate is 5.10% and ED trades at 5.50%, the TED spread is 40 bps. The TED spread fluctuates over time, but historically has often remained within the range of 10 and 50 bps (0.1% and 0.5%), until 2007.

The OP is a little confusing on the implications of the TED Spread: "So, where do things stand today? We are at 096, which ain't great, but it is 4.33, which meant no one was lending squat to anyone." The first number, 096, is in basis points, while the 4.33 is the raw percentage -- and "it is 4.33" should read "it was". Also, the gives a TED Spread peak (on October 10, 2008) of 4.64%. So, the point being made is: Right now investors are demanding a premium of nearly a full percentage point before they'll invest with private lenders. That's higher than historical (pre-2007) norms, and indicates that it's still difficult to get credit (because it's difficult for the private lenders to get the money to loan). Last summer and fall, though, the situation was much worse. Beginning in September 2008, there was a steep run-up in the TED Spread, peaking at over four percent, and it didn't get back to the one percent range until early this year.

Here's showing the TED Spread from 2004 until a point in September, 2008. You can see how, beginning in 2007, investors became much more nervous, and began extracting a higher premium in exchange for forgoing the safety of T-Bills.

I know its arcane, but it is an interesting distraction from discussions of teaparties and facism.