What is the TED spread?

The TED spread is the difference between the three-month London Interbank Offered Rate (LIBOR) and the three-month US Treasury bill yield. Because Treasury bills are considered risk-free while LIBOR reflects the rate at which banks lend to each other, the spread captures the additional compensation the market demands for interbank credit risk versus sovereign credit risk.

During normal market conditions, the TED spread typically ranges from 10 to 50 basis points, reflecting modest interbank risk premiums. When banking system stress rises, the spread widens dramatically because banks become reluctant to lend to one another and demand higher rates for short-term interbank credit. The spread reached 450 basis points during the peak of the 2008 financial crisis when counterparty fears paralyzed the interbank lending market.

The spread serves as a barometer of systemic financial stress and liquidity conditions. A widening TED spread signals that banks perceive higher counterparty risk, which typically triggers a broader tightening of credit conditions as banks pull back on lending to the real economy. Central banks monitor the spread as an early warning system for funding market dislocations.

With the transition from LIBOR to SOFR, the classic TED spread calculation has been modified, but the underlying concept remains relevant. Analysts now track the SOFR-Treasury bill spread or other money market stress gauges that serve the same function of measuring the gap between secured government rates and broader funding market rates. Regardless of the specific benchmark, the spread between "safe" and "risky" short-term rates remains a critical credit cycle indicator.