TED spread - Financial definition

The TED spread is a measure of liquidity and is an indicator of the degree to which banks are willing to lend to one another. It is also an indicator of perceptions of credit risks facing commercial banks.

Treasury bills are considered virtually risk free, while LIBOR reflects credit risks associated with one bank lending to another bank—the so-called «counterparty risk». As the TED spread goes up (because the 3-month LIBOR has risen or the 3-month T-bill yield has fallen, for example), there is an indication that banks perceive an increase in counterparty risk and/or investors have a stronger preference for safe investments. Roughly speaking, a higher TED spread indicates higher anxiety among lenders and creditors.