Some Analysis of The TED Spread

Someone asked me about what the Ted spread has been doing lately and if its movements had any impact on the stock market today. Here was my response:

"Today TED has come back down to 1.0 then bounced back to around 1.10. This level was the lowest it has been since March. In January and February its lows were at 0.83 and 0.79 before turning back up to above 2.0 on March 20th. As recently as April 23rd it was above 2.0. Also for reference on August 20th it spiked to 2.3 or so before falling back to 1.0 on August 24th.

The TED spread is the difference between the LIBOR and the 3 Month TBill. When the Fed cuts rates the 3 month TBill moves lower almost exactly the same amount. However LIBOR is determined by an average of what banks are willing to lend to each other at. If the Fed cuts rates theoretically the banks should be cutting the rates that they charge to each other. However due to persistent nervousness in the banking sector banks are charging a premium to other banks if another bank wants to borrow money. This has the Fed worried. Clearly some banks are being charged higher rates, but the question remains why? Since LIBOR is an average rate it is hard to know exactly where the problem lies.

My take is that the Fed watches this like a hawk and is concerned. Therefor it has been a piece of information that I follow closely. The Fed wants the spreads to drop to around 0.50 that is why they increased the treasury facilities - they are trying to funnel money into the problem. TED has been elevated for quite some time and that is also a component of this problem. In my view the TED spread has been very high since August and although a couple of times it made an attempt to normalize by going below one it never made it and soon after retreated back to above 1.0 before spiking twice to 2.0 or above.

Did it cause the market turmoil today? Not really if anything it may have helped the markets since the spread narrowed a little today and over the past week or so. That said it still is in elevated territory and remains a big problem for the Fed. If it makes its way below 1.0 and sticks and eventually makes its way to 0.50 that would mean things are better but until that time there is a persistent problem in these spreads."