The TED Spread is the difference between the 3-month LIBOR and the 3-month US Treasury Bill. The LIBOR is the short-term rate at which the world's most credit-worthy banks charge each other. When the TED spread increases, this is often perceived as an increase in counter-party risk between banks. An increasing TED spread is often a perceived as a warning sign of economic decline.
On today's Market Measures, tastytrade looked at how changes in the TED spread affect the financial sector, by looking at XLF when the TED spread jumped 25% and 50%. When the TED spread jumped 25% we saw that 6 months later, the average return for XLF was -16%, and when it jumped 50%, we saw that the average 6-month return of XLF was -26%.
We can see that large rises in the TED spread show little impact in the short term, but looking >6 months away, we see that it can be an indicator for the financial sector, although there were not many occurrences.
Be sure to tune in to hear the team break down the results!