Tuesday, October 14, 2008

The TED Spread: A Measure of the End of the Credit Crisis

What a week we had. . .

Emergency G7 meetings, massive stock market gains & the"nationalization" of global banks.
Although no one know when the bleeding will truly end and if (and how much of) a recession we are in for --  in my humble opinion we can at least measure the end of the credit crisis that was a prime impetus of the stock market collapse with the TED spread (click here for the current spread)

Edit: From Econbrowser:
One measure that is being used to summarize the strain in financial markets is the TED spread. This is calculated as the gap between 3-month LIBOR (an average of interest rates offered in the London interbank market for 3-month dollar-denominated loans) and the 3-month Treasury bill rate.
The TED spread hit a recent high of 4.64 lastFriday. This is far above the highs reached during the previous waves of the credit crisis.

Any significant decline would suggest progress, and a decline below 1.0 would indicate this wave of the crisis is over.

Usually the TED spread is less than 0.5%. The higher the spread, the greater the perceived credit risks (compared to "risk free" treasuries).