>What's the 'TED spread?'
A little while ago, when I posted about treasuries vs. AA corps. spreads
making new highs around 175 basis points, I said:
"... As a comparison, let's say that in the 98
crisis, that spread climbed quickly from around 75 to around 125 BP. This is
supposed to indicate a lack of confidence in the big US coporations or a
"flight to quality". Interestingly, the TED spread is low. This is supposed to
indicate confidence in the banks. Maybe it's the effect of the current strenght of
the dollar (and of treasuries)."
This is a little short, so I'll add that TED stands for treasuries vs. eurodollar
(euro here meaning not the currency but that the dollars are on the international
scene, anyway here the term refers to the interest rate for interbank deposits
of US Dollars held outside the United States). The eurodollar rate reflects not
only the Fed's rates but also how risky people think it is to lend money to big
international banks. People play this spread by buying US government bonds
(traditionally of a 90 days maturity) futures and selling eurodollar futures short.
If something really bad happens, then they make lots of money because the
sky's the limit as to the width of the spream (f.ex. the oldest traders have seen it
above 5%).
For a chart:
http://www.prudentbear.com/slides/spreads/sld010.htm
The spread with junk bonds might also interest some people. It currently
stands around 5,75%. This spread has not been that high since the 1998 crisis,
it seems. For the record, the spread with big corporations is around 1,7% and
stable at this extraordinarily high level.
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