Measuring Stress in the Credit Markets

One way to determine the level of stress in the credit markets is to take a look at the TED Spread, which is the difference between the rate at which banks lend to each other and the yield on short-term U.S. Treasury bills. ("TED" stands for Treasury - Eurodollar).  When the spread widens significantly, it is one indication that the financial system is under strain.  

The average long-term spread for three-month maturities has been 0.50%.  However, at the peak of the credit crisis in October 2008, the spread hit an historic high of 4.63%.  Banks were willing to lend to one another only at high nominal rates.  

With the recent woes in Europe and the problems between North and South Korea, the three-month spread widened to 0.34% on May 21, indicating that the financial markets are functioning without undue stress at the current time.  Please click here for a five-year historical view of the TED Spread.

Scott Middleton