The TED spread is the difference between the three month LIBOR (London Inter-Bank Offer Rate) and three month T-bill interest rate. It is a good measure of credit risk and willingness of banks to lend (to each other), because U.S. T-bills are considered risk free while the LIBOR rate reflects the credit risk of lending to commercial banks. As the TED spread increases, the risk of default is considered to be increasing, and investors will have a preference for safe investments. Recent data puts the TED spread at 2.75% versus 4.5% at the start of last week. While this is a positive, and shows that credit markets are beginning to respond to the extraordinary steps taken by governments, the spreads still remain high and share markets remain concerned about the poor outlook for global economic growth and profits.
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