Excerpt from: Spot Forex
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| October 10, 2008 | | TED spread widens by a large margin | Spread betting and contracts for differences on interest rates and on financial markets should consider the continuing disconnect between the Libor and T-bills. As the Libor heads every higher, the TED spread widens.
What is the TED spread?
Simply put, the TED spread is the difference between the Libor and the rate offered on U.S. T-bills. For the longest time, the rates were practically identical. This is because lending to the big banks short term was considered just about as safe as lending to the U.S. government.
Not so much anymore. Here is what The Big Money points out about TED now:
Not surprisingly, interest rates on loans between banks are higher than
the interest rate on T-bills. The higher interest rate on interbank
loans compensates for the fact that a short-term loan to a bank is
riskier than a short-term loan to the U.S. government.
You can see why many are looking to the TED spread in order to capture the essence of this financial crisis. It's becoming an issue of confidence. And if there isn't confidence in lending to other businesses, liquidity isn't going to happen.
| Topic Tags: contracts for differences, financial markets, Libor, spread betting, spread betting interest rates, T-bills, TED spread | |
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