Economic Outlook- The Ted Spread

Throughout this recent economic malaise, much has been said about a “credit crunch,” an unwillingness of banks to lend to one another because of concern over the value of toxic subprime mortgage assets.

The way we measure the level of confidence between banks, and thus the willingness to lend and eliminate the frozen credit market, is by comparing the rate that banks charge one another to lend on a short term basis, to what the government charges to lend. The spread between these two rates is referred to as the TED Spread.



Historically, the trend has been a spread of .50 to 1.00. As you can see in the chart above, distrust reached its peak in October of 2008, when Lehman Brothers failed, and the spread leapt to over 4.00. In recent weeks as companies have reported earnings and the market has begun to rally, we’ve seen significant “thawing” in the credit market, and the spread has eased to .57. This has positive implications for the financial sector and for the economy overall.