A Look at the Ted Spread

With Libor actually rising and Treasury yields declining, the TED spread (3M Libor - 3M T-Bill) has been steadily rising.  Today the ratio closed at 2.15, which is just shy of Thursday's high of 2.16.  While the high TED spread usually signals stress in the financial system, an elevated reading is not necessarily bad for stock prices.  Instead, investors should focus on the direction of the spread.

In the chart below, we show the Ted Spread over the last 20+ years.  In 1987, the spread peaked the day after the crash (10/20), and remained elevated for the next year.  Over that period, the S&P 500 rose 23.2%.  In the 1998 period, the TED spread peaked on 10/16/98 which was over a week after the market made its intraday low (10/8), and over six weeks after the closing low (8/31).  One year after the 1998 peak in the TED spread, the S&P 500 had risen 18.7%.

Comments

[Aaron]

Interesting chart. It is interesting that the TED seems to nearly always peak after the market has hit a bottom. Might be a trading opportunity based off this chart.

[Mish]

In 1987, the spread peaked the day after the crash (10/20), and remained elevated for the next year.

That is the key sentence.
There was a crash first.
We are in crash conditions now.
http://globaleconomicanalysis.blogspot.com/2007/12/deflationary-credit-downturn-is.html
Mish

[Subramanian Sharma]

Maybe, it hasn't peaked yet, maybe the spread will go higher

[Ted]

There was a several month long episode of the TED spread in 1987, unlike all the other spikes which are essentially one or two day events. What is worrisome now is that this episode with TED is even longer in length than '87

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