Monday, September 21, 2009

Ted Spread Shows Banks in Extreme Distress

A lot has been made in the MSM of the falling Ted spread, or the difference between the 3-Month Treasury rate and the interbank lending rate. A high Ted is commonly viewed as a sign that banks are not very creditworthy.

In absolute terms, the Ted is rather low at .18%. But a closer examination shows the Ted is trading at extremes never before explored. Let's take a look:

Even a Yale-trained economist can see that over the past decade the Ted has generally hovered around 50 basis points, or a 1/2 percent above the 3-M T. But obviously absolutes don't matter, what matters is what the premium represents in terms of the anticipated return. If I'm expecting a return of $5 per $100, a 0.5% premium of is a 10% surcharge. If I'm making $1 per $100, a 0.5% premium is a 50% charge.

With common sense in mind, the chart below shows what the Ted has actually been doing. Historically, banks have paid a relatively stable 10% to 20% premium for each dollar earned. With that in mind, a "drop" to 400% doesn't sound quite as wonderful:

1 comment:

  1. Thanks for this FDR. I've been following the TED since last fall and I was curious as to why it seems so low when the distress in the banking system is still evident.


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