Chart of the Day: Gulp

Posted on May 19, 2010

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Ah… The TED Spread. The EKG of the global banking system.  The higher it goes, the less banks trust each other.

The TED spread is an indicator of perceived credit risk in the general economy.[1] 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 risk) 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.[2]

1 year chart…

But let’s keep it in perspective people…. Here’s the 3-year. Now THAT’s what a heartache looks like…

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