The TED spread and what it means… Imagine your job at a bank is to take billions of dollars and invest them. This pile of money is short term and has to be invested in the safest possible things. You have two options – you could buy a 90 day Treasury note or you could lend the money to another bank – one that is “too big to fail” – one that has an implicit government guarantee behind it – based on the London Interbank Offer Rate (LIBOR). The difference between those two rates is called the TED spread – it indicates the perception of risk that banks might be about to fail. The higher the TED spread goes, the more that people who know what is going on are expecting a banking crisis…
If the TED spread ever went negative, it’s time to get really worried – that would mean people thought money was safer in banks than in the US Treasury….
