Check Out the “TED Spread”

Perhaps the best way to measure the magnitude of the credit crisis is to look at the TED Spread. What is the TED Spread?

The TED spread measures the difference between the 3-month Libor and the 3-month Treasury bill, and is a key indicator of risk. The higher the spread, the bigger the aversion to risk. The spread was 1.04% just a little more than a month earlier and reached a record high of 4.65% on Friday.

So when everything is fine, investors only demand a little more return (usually less than 1% more) when they lend to banks than they demand from the risk-free Treasury Bills and Notes. But now they are demanding way, way, way more return (4.65% on Friday), because lending to a bank now seems so, so risky.

Here’s a nice chart which shows the movement over the last 18 months. Pretty ugly, isn’t it?

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