What is the Narrowing TED Spread Trying to Tell Us? | Intermarket Analysis

Follow us:

Twitter

RSS

Facebook

What is the Narrowing TED Spread Trying to Tell Us?

Seeing Signs of Improvement

The TED Spread is narrowing—which is a good sign for the economy—but what exactly is it trying to tell us? What can we learn from a narrowing TED Spread?

As you will see in the video below, the TED Spread is trying to tell us that investors are still nervous but banks are becoming less so. [To learn more about what makes up the TED Spread and how it is calculated, check out this article and video on Understanding the TED Spread.]

Chart: LIBOR

Check out the chart of LIBOR.

Narrow Spread = Positive Sign for the Economy

A narrow TED Spread is a good sign for the economy, but you have to dig in a little deeper to see what is really happening to cause the TED Spread to narrow.

The TED Spread is comprised of two components—the 3-month Treasury Bill (T-bill) and the eurodollar futures contract—and either one of them can affect how wide or narrow the TED Spread becomes.

In this case, the eurodollar futures contract (which is based on the LIBOR—see chart) is the one that is driving the TED Spread. The LIBOR has been steadily declining for the past few weeks now, and that has caused the the TED Spread to narrow.

Seeing a falling LIBOR tells us that banks are starting to lend to each other again and the frozen credit markets are beginning to thaw.

Video Lesson: What is the Narrowing TED Spread Trying to Tell Us?

I've scratched the surface of this topic in the article above, but I go into much more detail in the video below.