TED Spread: Definition, Use, and Calculation

What is the TED spread?

The TED spread is the difference between the three‑month London Interbank Offered Rate (LIBOR) for U.S. dollars and the three‑month U.S. Treasury bill rate. It measures the gap between the interest rate banks charge one another for short‑term loans and the risk‑free rate represented by short‑term U.S. government debt. “TED” stands for Treasury‑EuroDollar.

Key takeaways

• TED spread = 3‑month LIBOR − 3‑month T‑bill rate.
• It is used as an indicator of credit risk and perceived banking‑sector stress.
• A wider TED spread signals higher perceived default or liquidity risk among banks; a narrower spread signals lower perceived risk.
• LIBOR has been phased out for many uses; market participants increasingly use alternative reference rates (e.g., SOFR) for USD contracts.

Why it matters

U.S. T‑bills are considered essentially risk‑free, so comparing the interbank lending rate (LIBOR) to T‑bills reveals how much extra yield lenders demand to accept counterparty and liquidity risk. When banks worry about other banks’ solvency or liquidity, they raise interbank lending rates or reduce lending, which widens the TED spread. A rising TED spread often accompanies periods of financial strain and reduced credit availability.

Origin and interpretation

Originally, the TED spread was computed from futures contracts on three‑month Treasury bills and three‑month Eurodollars. After changes in futures markets, the spread is commonly computed directly from interest rates (3‑month LIBOR and 3‑month T‑bill yield). Historically the spread normally ranged roughly between 10 and 50 basis points; it can expand dramatically during crises (for example, it peaked around 450 basis points after the 2008 collapse of Lehman Brothers).

Calculation and example

Formula:
TED spread = 3‑month LIBOR − 3‑month T‑bill rate

Example:
If 3‑month LIBOR = 1.79% and 3‑month T‑bill = 1.43%, then
TED spread = 1.79% − 1.43% = 0.36% = 36 basis points (bps).

Practical notes

• Use the TED spread as a broad, high‑level gauge of interbank credit risk and market stress—not as a precise predictor of specific events.
• LIBOR’s publication was discontinued for many tenors and currencies; USD markets have moved toward alternative reference rates such as the Secured Overnight Financing Rate (SOFR). Market practitioners now often monitor spreads between short‑term bank lending rates (or benchmark alternatives) and Treasury yields to assess stress.
• For current series and historical charts, central bank data repositories (for example, the Federal Reserve Economic Data — FRED) publish TED‑style spreads and related indicators.