The TED spread is the difference between the yield on the 3-month U.S. Treasury bill (a safe, 3-month loan to the U.S. government) and the yield on the 3-month LIBOR (a riskier loan to a bank in the London wholesale money market). It’s an important indicator of how much trust exists between large, international banks, which also makes it a good gauge of how freely capital is flowing through the international banking system.
In general, when the TED spread is high, banks are worried that short-term loans made to other banks won’t get repaid. When the TED spread is low, banks are confident that short-term loans made to other banks will be paid back. A TED spread below 50 basis points is a good indication that the global banking system is healthy. At the worst point in the GFC, the TED spread was almost 461 basis points. Today it’s under 18.
What I don’t get is, given the very positive global climate above, why won’t a local bank do repeat business with an established client with an excellent credit history? The case in point is a Sydney-based Radiology practice who acquired a new Ultrasound System late last year. I helped them get a 5-year facility with a lender new to the practice. So, when the same practice bought another replacement Ultrasound System and some IT this year, I took it back to the same lender and was shocked when they declined the opportunity on the basis that they don’t do sale and leasebacks on any equipment that’s over 30 days old.