Tuesday, October 14, 2008

Learn You Some TED, Fred!

(Note to the already initiated: skip this post.)

Ok, now that you know what a derivative is, here's what to watch this week and next: the Ted spread.

The Ted spread can be thought of as an indicator of credit risk. It measures the price difference between three-month futures contracts for U.S. Treasuries (aka, T-bills/the paper/loans that the FED is printing to raise/borrow all the billions it's injecting into the banks right now) and three-month contracts for Eurodollars (aka, LIBOR, London inter bank offer rate) having identical expiration months. This is because U.S. T-bills are considered risk free while the rate associated with the Eurodollar futures is thought to reflect the credit ratings of corporate borrowers. As the Ted spread increases, default risk is considered to be increasing, and investors will have a preference for safe investments. As the spread decreases, the default risk is considered to be decreasing. (Some investopedia copy-and-pasting in the this paragraph.)

While the headlines are dedicated to the DOW, it's really all about the Ted, right now.

So, here's the Ted now (and you can track it here)...