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What is the ted spread?

August 17, 2011


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TED is an acronym formed from T-Bill and Eurodollar. The TED spread originally meant the gap between interest rates for three-month US treasury bills and interest rates for the three-month dollar-deposits held outside the US. Nowadays it is calculated as the difference between the three-month treasury bill interest rate and three-month London Interbank Offered Rate (LIBOR).

The TED spread is used as an indicator of investor confidence: When inter-bank lenders are concerned about potential defaults by their counterparties, the LIBOR increases thus the TED spread increases as well, while a narrow spread indicates high confidence.

Contracts based on TED spread are traded on the futures markets. Traders bet on the narrowing or widening of the gap.

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