What is the TED Spread?

Over the last several days, you may have noticed an unfamiliar term making its way into financial conversations, namely the TED Spread.  The TED spread measures the difference between the three month US Treasury Bill and the three month Eurodollar Future.  Elevated readings in the indicator indicate an increased level of risk aversion in the market, as investors flock to short term T-bills, which due to their credit quality and short time horizon, are considered risk free, while Eurodollar futures are more representative of the credit quality of corporate borrowers.

Below we show the history of the TED Spread dating back to 1986, along with how the market performed following similar spikes to the current one.  As the results illustrate, the S&P 500's performance following extreme readings are mixed.  In three out of four of the periods where the TED spread spiked, the market was higher three months later.  However, the one time it had a negative return was in 1987 when the market crashed.

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