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The TED spread measures the gap between the interest rate at which the U.S. Treasury funds itself (3-month T-bills) and the interest rate at which banks lend to each other (3-month LIBOR: London Interbank Offered Rate).

The TED spread is an indicator of perceived credit risk in the general economy. This is because T-bills are considered risk-free while LIBOR reflects the credit risk of lending to commercial banks. When the TED spread increases, that is a sign that lenders believe the risk of default on interbank loans (also known as counterparty) is increasing. Interbank lenders therefore demand a higher rate of interest, or accept lower returns on safe investments such as T-bills. When the risk of bank defaults is considered to be decreasing, the TED spread decreases.

The TED spread measures the gap between the interest rate at which the U.S. Treasury funds itself (3-month T-bills) and the interest rate at which banks lend to each other (3-month LIBOR: London Interbank Offered Rate).

The TED spread is an indicator of perceived credit risk in the general economy.  This is because T-bills are considered risk-free while LIBOR reflects the credit risk of lending to commercial banks. When the TED spread increases, that is a sign that lenders believe the risk of default on interbank loans (also known as counerparty) is increasing. Interbank lenders therefore demand a higher rate of interest, or accept lower returns on safe investments such as T-bills. When the risk of bank defaults is considered to be decreasing, the TED spread decreases.