Technically, the TED spread is the difference between the interest rates on interbank loans and on short-term U.S. government debt ("T-bills"). TED is an acronym formed from T-Bill and ED, the ticker symbol for the Eurodollar futures contract.
TED spread is a usefull indicator of the credit market stress. An increase in the TED spread is a sign that lenders believe the risk of default on interbank loans (also known as counterparty risk) is increasing. In other words, an increase in the TED spread is an indicator of fear of a possible banking crisis (not necessarilly of the crisis itself; however, even the fear itself may be costly for equity investors.)
This is what the TED spread is saying now:
- Maybe the good old TED has lost its forecasting power. Everybody knows that the Fed would not let the banks down, ever. Thus no stress, whatever the economy (and the stock markets) may do.
- Perhaps the fuss about the end of QE is overrated, and nothing really happens when the QE would be formally finished.