Redstate

Posted at 3:27pm on Mar. 24, 2008 An Esoteric, but Excellent, Bit of Financial News [Updated]

The TED spread plunges

By blackhedd

Impress your friends. Tell them that the "TED spread" dropped like a rock today, from over 200 basis points to about 150.

What the heck does that mean? "TED" is ticker-symbol shorthand for Treasury-Eurodollar. The TED spread is the difference between three-month dollar-LIBOR and the three-month US Treasury bill rate.

LIBOR is an interest rate charged by banks in London when they lend their dollar-denominated reserves to each other.

LIBOR is usually slightly higher than the risk-free interest rate of the same maturity. To compare LIBOR with the Treasury bill rate is to measure the willingness of banks to lend to each other.

The TED spread being well over 2% as it has been for weeks, indicates extreme dysfunction in the money markets. Something happened today to significantly bring the spread down. I don't know what it is yet, but if it's not just a technical blip, it's very good news.

Update: At 8am EDT on Tuesday the 25th: the TED spread is down to 144 basis points. The Fed's first auction in the new Term-Securities Lending Facility is tomorrow, and money markets are focused on that. The three-month T-bill rate is well over 1% this morning, up considerably from exceedingly low levels last week. Stock markets are up overseas and will open up in New York.

In short, the Bear Stearns fever may be breaking. You can start breathing again.

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