Ted Spread

The Ted Spread, or TED Spread, is the difference between two interest rates for a given 3-month period: the interest rate on short-term U.S. government debt, and the interest rates of interbank loans.

TED stands for "Treasury-Euro Dollar." To get your TED Spread, the Treasury part comes from the interest rate on U.S. Treasury bills, and the Euro Dollar part comes from LIBOR.

See: LIBOR for more deets, but the TL;DR is that the London Interbank Offered Rate is the average market rate of what leading banks in London are charging each other for loans, so it’s a market rate, not a government-set rate. The federal funds rate, or fed funds rate, is set by the Federal Open Market Committee, the major committee of the Federal Reserve, the U.S.’s central bank.

The TED spread indicates the severity credit risk in the market. Since the U.S. dollar is the “it girl” currency of the world, U.S. Treasury bills are considered risk-free. Thus, the TED Spread measures the difference between the LIBOR interbank market rate and the risk-free, government-set T-bill rate.

The larger the TED spread, the higher interest rates banks are demanding, reflecting a perceived increase in default risk in the eyes of banks. A lowering TED spread means banks took a chill pill; their risk seems to be decreasing. For instance, the TED spread was sky-high when Lehman Brothers collapsed in 2008, which put the other banks on their guard in terms of interbank lending.