What's the TED Spread?

How it signals stress in the market.

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Today, the gulf between the three-month U.S. Treasury yields and the three-month LIBOR rate—aka the TED Spread—widened to its highest level since the 1987 stock market crash. LIBOR (pronounced LYE-bor) is the interest rate at which banks charge each other on the London interbank market.

So, what's the significance? Essentially, the TED Spread measures market stress by revealing the willingness (or reluctance) of banks to lend money to one another. "A jump in the spread shows how panicky banks are, in that they are charging each other a bigger interest-rate premium than money lent to the U.S. government," says CNNMoney. (You can find more on the implications here.)

Why did the spread widen? Three-month rates on T-bills dropped to their lowest since at least 1954, Bloomberg reports, as "a loss of confidence in credit markets worldwide prompted investors to abandon higher-yielding assets for the safety of the shortest-term government securities." Remember, a "flight to safety" sends bond prices higher and yields lower, because bond prices move inversely to yields.