TED Spread and LIBOR-OIS: Measuring Interbank Stress

Key Takeaways

• TED spread equals 3-month LIBOR minus the 3-month T-bill yield; LIBOR-OIS equals 3-month LIBOR minus the OIS rate.
• LIBOR-OIS removes flight-to-Treasury distortion, making it a cleaner measure of interbank credit and liquidity stress.
• Both series were discontinued after LIBOR ceased publication in January 2022; SOFR-based alternatives now fill the role.
• The TED spread hit approximately 457 basis points in October 2008, signaling a near-complete freeze in interbank lending.

What It Is

The TED spread was the difference between 3-month LIBOR (the rate at which banks said they could borrow unsecured from each other in dollars) and the 3-month US Treasury bill yield (considered risk-free). The name comes from "T-Bill" and "ED," the ticker for Eurodollar futures.

TED spread = 3M USD LIBOR - 3M Treasury bill yield

The LIBOR-OIS spread was the difference between 3-month LIBOR and the 3-month overnight index swap (OIS) rate. OIS reflects the expected average Fed funds rate over the period and is effectively unsecured but overnight and therefore very low risk. LIBOR-OIS isolated term credit and liquidity risk more cleanly than TED, because OIS removes the "flight-to-Treasury" demand that can distort T-bill yields.

LIBOR-OIS spread = 3M USD LIBOR - 3M OIS rate

Both series were discontinued after LIBOR ceased publication. The FRED TED series stopped updating on 31 January 2022. Post-LIBOR, analysts use SOFR-based and repo-vs-Treasury spreads to track similar stress.

The Intuition

Banks in normal conditions lend to each other for three months at roughly the expected path of the overnight rate plus a small risk premium. When the premium widens, it signals one of two things: banks doubt each other's solvency (credit risk) or they cannot easily roll funding (liquidity risk). The two spreads picked up both.

Because Treasuries are a haven in a crisis, the TED spread can widen from both ends at once. T-bill yields collapse as investors flee to quality, while LIBOR rises as banks demand compensation for risk. LIBOR-OIS strips out the haven effect and focuses specifically on interbank stress.

Alan Greenspan, who referred to LIBOR-OIS in his commentary during the 2008 crisis, called it a strong indicator of money-market stress. St. Louis Fed researchers formalized that view in the paper "The LIBOR-OIS Spread as a Summary Indicator."

How It Works

In normal times both spreads hover within tight ranges. TED typically ran 10 to 50 bps; LIBOR-OIS typically around 10 bps. When the spreads widen beyond historical norms, practitioners read the move as evidence of funding stress.

Three benchmarks help interpret the numbers.

• Normal. TED under about 50 bps; LIBOR-OIS near 10 bps.
• Elevated. TED in the 50 to 150 bp range; LIBOR-OIS in the 30 to 80 bp range. Something is happening, but markets still function.
• Crisis. TED above 200 bps or LIBOR-OIS above 100 bps. Interbank funding is impaired.

These are heuristics, not hard thresholds. Regimes shift with monetary policy, T-bill supply, and bank regulation.

Worked Example

Consider the September-October 2008 period after Lehman Brothers filed for bankruptcy. The TED spread reached roughly 457 bps on 10 October 2008 and around 456.5 bps on 13 October 2008, a record high in the series. LIBOR-OIS hit approximately 365 bps on 10 October 2008, the highest level in that series. Both readings were an order of magnitude above any normal range.

Short-term T-bill yields collapsed toward zero as investors hoarded safe assets, while 3-month LIBOR rose sharply because banks suspected each other of holding toxic mortgage exposures. Interbank unsecured lending effectively froze, which is why the Federal Reserve launched the Term Auction Facility, Commercial Paper Funding Facility, and dollar swap lines with foreign central banks.

For comparison, the October 1987 equity crash produced a TED spread near 300 bps, and the March 2008 Bear Stearns episode pushed the spread to roughly 200 bps. The Lehman episode was materially worse than either.

Common Mistakes

• Quoting TED spread figures after 2022. The series was discontinued when LIBOR stopped publishing. Any chart extending the traditional TED spread past January 2022 is fabricated or reconstructed. Use SOFR-based alternatives instead.
• Treating the spreads as interchangeable. LIBOR-OIS removes the flight-to-Treasury bid that distorts TED. During true credit shocks, LIBOR-OIS is the cleaner read.
• Ignoring regulatory effects on baselines. Post-crisis rules (Basel III liquidity coverage, money-market fund reforms) changed the "normal" range for both spreads. Direct comparison to 1990s levels is misleading.
• Assuming wide spread automatically signals a crash. In 2011, TED widened on European bank concerns, yet US equities recovered within months. The indicator shows funding stress, not necessarily equity-market direction.
• Forgetting that LIBOR was a survey rate. LIBOR was based on bank submissions, not transactions. That made it manipulable (documented in post-2012 enforcement actions) and contributed to the shift to transaction-based SOFR.

Frequently Asked Questions

Why did the TED spread and LIBOR-OIS diverge during the 2008 crisis? During the Lehman collapse, both spreads widened sharply but the TED spread widened more because it includes a flight-to-safety effect. As investors poured money into T-bills, bill yields collapsed close to zero, which mechanically widened the TED spread beyond what the interbank stress alone would suggest. LIBOR-OIS, which compares LIBOR to the expected overnight rate path, stripped out this haven demand and provided a cleaner read on actual bank funding stress.

What replaced TED spread and LIBOR-OIS after the LIBOR transition? Analysts now monitor the SOFR-OIS basis (spread between SOFR and the Fed funds rate), the spread between 3-month SOFR and 3-month Treasury bills, and CP-OIS spreads (commercial paper versus overnight rate). None has achieved the same universal recognition as TED spread and LIBOR-OIS had, partly because SOFR is a secured rate that behaves differently in stress scenarios from the unsecured LIBOR.

Why was LIBOR discontinued if it was so widely used? LIBOR was discontinued because it was a survey-based rate where banks submitted estimates rather than actual transaction prices. Multiple banks were found to have manipulated their LIBOR submissions to benefit their own trading positions or to project an appearance of financial strength, as documented in enforcement actions from 2012 onward. Regulators shifted to SOFR, which is based on actual overnight Treasury repo transactions and is therefore much harder to manipulate.

What is the OIS rate and why is it considered near risk-free? An OIS (overnight index swap) is a contract where one party pays a fixed rate and receives the daily compounded average of the overnight rate (Fed funds for USD) over the swap's term. Because each daily payment is only one day of credit risk and the netting means minimal cash changes hands, OIS credit risk is almost entirely eliminated. The OIS rate therefore closely reflects the expected path of central bank policy rates without meaningful credit or liquidity premium.

Is the SOFR-based equivalent of TED spread useful for monitoring current stress? SOFR is a secured rate backed by Treasury collateral, so it does not spike in the same way LIBOR did during bank stress, because the collateral backing each transaction provides protection. As a result, SOFR-based spreads are structurally tighter and less sensitive to bank credit concerns than the old LIBOR-based spreads. For monitoring unsecured bank funding stress, practitioners now look at commercial paper spreads, FRA-OIS spreads in other currencies, and bank CDS as supplementary indicators.

Sources

1. St. Louis Fed. The LIBOR-OIS Spread as a Summary Indicator. Economic Synopses, 2008 No. 25. https://files.stlouisfed.org/files/htdocs/publications/mt/20081101/cover.pdf
2. FRED (St. Louis Fed). TED Spread Series (discontinued January 2022). https://fred.stlouisfed.org/series/TEDRATE
3. Federal Reserve Bank of Minneapolis. Measuring Perceived Risk: The TED Spread. https://www.minneapolisfed.org/article/2008/measuring-perceived-riskthe-ted-spread
4. FRED Blog. TED on FRED. https://fredblog.stlouisfed.org/2016/07/ted-on-fred/

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.