The Ted Spread

Yesterday, I attended an excellent conference on monetary policy at the Bush Library—Bush 43 that is. While all the participants were excellent, the big draw was former Chairman, Ben Bernanke, in the flesh.
Chairman Bernanke was interviewed by President Bush’s former Chief of Staff, Josh Bolton, who was in on some of the conversations between the President, Chairman Bernanke, and Treasury Secretary Paulson in the early days of the financial crisis.
It came as a surprise to me that President Bush himself introduced the two of them and told some stories about those crisis days. In talking about the need for presidents to surround themselves with experts, he recalled someone bring up the Ted spread. He said he didn’t even know what the Ted spread was, implying that Chairman Bernanke did.
It was a large audience, but I knew several people there and even more remembered me from my days as president of the Dallas Fed (1991-2004). The mention of the Ted spread shot a bolt of anxiety through me because there was an excellent chance that someone would ask me to explain it to them, and I knew I couldn’t.
I’d never heard of the Ted spread before the financial crisis, but I looked it up then and became half way familiar with it. Not totally familiar, or it would have stuck with me rather than fading away as it did. Fortunately, no one asked me and I didn’t have to humiliate myself. After the conference, I had lunch in the Library’s café—Café 43.
Of course, I googled the Ted spread this morning and discovered part of the reason it didn’t stick with me. There are alternative definitions and none of them fit the acronym Ted very well. Ted, according to Wikipedia, gets its “T” from U.S. Treasury bills and the “ed” comes from Euro Dollar. Even on this simple basis, it’s confusing since “Euro Dollars” were originally European bank deposits denominated in U.S. dollars, and I’m pretty sure that has nothing to do with the Ted spread. Taken literally, that would be a comparison of sovereign debt rates in the U.S. to dollar denominated deposit rates in European banks, and I don’t think the Ted Spread ever meant that.
Acronyms aside, there is general agreement that the Ted spread is supposed to be a comparison of rates on riskless debt, as in U.S. Treasury bills, and the rates on private sector debt, as in LIBOR—the London Interbank Offering Rate—which is not limited to London or Europe. That appears to be the dominant definition these days. That spread, normally around 30 to 100 basis points, rises during uncertainty or crises and it rose dramatically during the 2008 crisis. This is the most common definition used—apparently—but not the only one. It neither fits its acronym, Ted, nor does it have one of its own. No wonder I couldn’t remember it.
However it is defined, a higher Ted number indicates market participants’ perception that risk in the private sector has increased and a lower number implies the opposite. Don’t worry, it’s low now.

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