The TED spread, a measure of the perceived credit risk in the U.S. economy, matched its lowest level in at least 40 years last week.
The breakdown: As Ken Faulkenberry at Arbor Investment Planner explains it: "Comparing the risk free rate [of 3-month U.S. Treasuries] to LIBOR provides an indication of the risk the global markets perceive in the global banking system."
- "A rising or high TED spread will often precede a downturn in the stock market because it indicates increasing risk of bank defaults and economic instability. A falling or low TED spread would indicate low risk of bank defaults and economic stability."
How it works: The metric tracks the 3-month U.S. Treasury bill yield and the value of the 3-month eurodollar futures contract, or 3-month LIBOR. ("T" for Treasury bill and "ED" for eurodollar.) It essentially measures the level of trust between banks or how creditworthy they deem one another.
Go deeper ... Warning: Signs of credit crisis grow