What is the TED Spread? No, it’s not Good on a Hotdog
I know we are bombarded with charts, graphs and predictions. Most of the pundits just want to sell you something. I am very skeptical of any government stats. (it’s just Me) Now, I have a credit & commodity market technical background. Ag. Economics, I’ve seen a technical chart or two.
It is extremely difficult to trend anything in a manipulated market place. What do I mean? The central planners (fed), through TARP, QE 1,2 and anything they thought could re-inflate the housing bubble have rendered technical analysis meaningless.
That said, there are some simple indicators one can watch to give you an idea, not perfect, of economic strength and possible direction of the economy.
Here’s the 1st- the TED Spread
Well, exactly what is the TED ? … The TED spread is an indicator of PRECEIVED CREDIT RISK in the general economy. TED spread is now calculated as the difference between the three-month T-bill interest rate and three-month LIBOR, (London Interbank Offered Rate, the rate banks charge each other for inter bank loans). When the TED spread increases,that is a sign that lenders believe the risk of default on interbank loans (also known as counter-party risk) is increasing. Interbank lenders therefore demand a higher rate of interest, or accept lower returns on safe investments such as T-bills. When the risk of bank defaults is considered to be decreasing, the TED spread decreases….
Here’s a chart (below) from Bloomberg (market close 9/23/11) that’s pretty easy to understand. Note the Trend Line is going up. There are Bollinger Bands that some investors use to indicate when to possibly buy & sell the index. For now just pay attention to the TREND LINE. It’s going up.
TED spread helps you keep an eye on the banks. I have 2 more simple indicators I will share soon.
Disclaimer: This is not an offering to invest in the equity or credit market. This is for information purposes only. Consult an advisor before purchasing an equity or credit instrument. I’m not a security broker or attorney. Just an old fart that happens to be a real estate investor/agent.
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