What is 'Ted Spread'

TED spread is the difference between three-month Treasury bill and three-month LIBOR based on US dollars. To put it another way, the TED spread is the difference between the interest rate on short-term US government debt and the interest rate on interbank loans.

TED is an acronym for Treasury-EuroDollar rate.


The TED spread was originally calculated as the price difference between three-month futures contracts on U.S. Treasuries and three-month contracts for Eurodollars with identical expiration months. After futures on Treasury bills (T-bills) were dropped by the Chicago Mercantile Exchange (CME) following the 1987 stock market crash, the TED spread was amended. It is calculated as the difference between the interest rate banks can lend to each other over a three-month time frame and the interest rate at which the government is able to borrow money for a three-month period.

The TED spread is used as an indicator of credit risk. This is because U.S. T-bills are considered risk free and measure an ultrasafe bet – the U.S. government’s creditworthiness. In addition, the LIBOR is a dollar-denominated gauge used to reflect the credit ratings of corporate borrowers or the credit risk that large international banks assume when they lend money to each other. By comparing the risk-free rate to any other interest rate, an analyst can determine the perceived difference in risk. Following this construct, the TED spread can be understood as the difference between the interest rate that investors demand from the government for investing in short-term Treasuries and the interest rate that investors charge large banks. As the TED spread increases, default risk on interbank loans is considered to be increasing. Interbank lenders will demand a higher rate of interest or will be willing to accept lower returns on safe investments such as T-bills. In other words, the higher the liquidity or solvency risk posed by one or more banks, the higher the rate lenders or investors will require on their loans to other banks compared to loans to the government. As the spread decreases, the default risk is considered to be decreasing. In this case, investors will sell T-bills and reinvest the proceeds in the stock market which is perceived to offer a better rate of return on investments.

TED Spread = 3-mth LIBOR – 3-mth T-bill rate

Typically, the size of the spread is designated in basis points (bps). For example, if the T-bill rate is 1.43% and LIBOR is 1.79%, the TED spread is 36 bps. The TED spread fluctuates over time but generally has remained within the range of 10 and 50 bps. However, this spread can increase over a wider range during times of crisis in the economy. For example, following the collapse of Lehman Brothers in 2008, the TED spread peaked at 450 basis points. A downturn in the economy indicates to banks that other banks may encounter solvency problems, leading banks to restrict interbank lending. This, in turn, leads to a wider TED spread and lower credit availability for individual and corporate borrowers in the economy.

  1. Credit Spread

    1. The spread between Treasury securities and non-Treasury securities ...
  2. Credit Spread Option

    A credit spread option is a financial derivative contract that ...
  3. LIBOR Flat

    An interest rate benchmark used to establish the floating interest ...
  4. Ask

    The ask is the price a seller is willing to accept for a security. ...
  5. Treasury Bill - T-Bill

    A Treasury Bill (T-Bill) is a short-term debt obligation backed ...
  6. Reduced Spread

    A reduction in the spread between the buy/bid and sell/ask price ...
Related Articles
  1. Investing

    How To Calculate The Bid-Ask Spread

    It's very important for every investor to learn how to calculate the bid-ask spread and factor this figure when making investment decisions.
  2. Investing

    The Basics Of The T-Bill

    The U.S. government has two primary methods of raising capital. One is by taxing individuals, businesses, trusts and estates; and the other is by issuing fixed-income securities that are backed ...
  3. Trading

    Spread-to-Pip Potential: Which Pairs Are Worth Day Trading?

    Spreads play a significant factor in profitable forex trading. Learn when it's worth trading and when it isn't.
  4. Investing

    The Bank Stocks Have Come Too Far Too Fast

    The bank sector has been buoyed by expectations of higher interest rates, but the rally justified?
  5. Trading

    Explaining Credit Spread

    A credit spread has two different meanings, one referring to bonds, the other to options.
  6. Trading

    Retail FX Spreads: Do They Even Matter?

    Learn how retail forex spreads affect your ability to trade currencies.
  7. Trading

    Which Vertical Option Spread Should You Use?

    Knowing which option spread strategy to use in different market conditions can significantly improve your odds of success in options trading.
  1. How can LIBOR be used as an economic indicator?

    Learn how the LIBOR is used, how it is calculated and how it can be used with Treasury bill rates to gauge the health of ... Read Answer >>
  2. In what types of financial situations would credit spread risk be applied instead ...

    Find out when credit risk is realized as spread risk and when it is realized as default risk, and learn why market participants ... Read Answer >>
  3. How do I set a strike price in an options spread?

    Find out more about option spread strategies, and how to set the strike prices for bull call spreads and bull put spreads ... Read Answer >>
  4. How does LIBOR compare to the Federal Reserve rate as an accurate indicator?

    Explore a comparison of the predictive efficacy of the Federal Reserve's fed funds rate and the Intercontinental Exchange's ... Read Answer >>
  5. What are the biggest risks involved with financial spread betting?

    Learn about financial spread betting, the risks involved with spread betting and the dangers of placing financial spread ... Read Answer >>
  6. What are the differences between the Federal Funds Rate and LIBOR?

    Learn the key differences between the federal funds rate and the London Interbank Offered Rate, including currency denomination ... Read Answer >>
Hot Definitions
  1. Liquidity

    Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's ...
  2. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  3. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  4. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  5. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center