TED Spread Below 4

It's still way too high, but the TED spread has finally dropped below 4. As of this typing, it's at 3.86.

The TED spread represents...

... the difference between the three-month LIBOR (the London interbank offered rate, set each morning for banks borrowing from each other) and the return on a three-month Treasury bill.

During the credit crisis, banks have grown wary of lending to each other, so they've charged higher interest. That means LIBOR goes up.

Meanwhile, investors have flocked to Treasury bills, which are very safe. Demand for Treasury bills has driven the return on them to near zero — and sometimes, believe it or not, into the negative. When that happens, investors are saying they're willing to lose a little money in exchange for having a place to safely deposit a large sum.

You can swing the math. Remember, the TED spread is the difference between two rates — it's LIBOR minus the return on a three-month Treasury bill. If LIBOR is high and Treasury bills are near zero, then the TED spread will be high, too.

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