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1 year ago

The TED Spread’s Economic Signal


Credit stress among banks has remained relatively calm recently, signaling an economic recession may not be as imminent as some investors fear.

As shown in the LPL Chart of the Day, the TED spread, or the difference between the 3-month London Interbank Offered Rate (Libor) and the 3-month Treasury yield, climbed above 1% in the 12 months before each of the last three recessions, a level that hasn’t been breached in the current cycle.

Global Credit Calm Compared to Past Cycle Peaks

The TED spread has climbed as high as 0.61% during this cycle, a level it reached in March 2018, and closed at 0.38% on January 11, 2019.

Libor is often used to gauge interbank lending fears since it represents rates that banks charge each other for short-term loans. If Libor climbs at a faster pace than U.S. government yields, it shows that banks are requiring more yield for these loans, implying more risk in the global financial system. The TED spread gained notoriety during the 2008 financial crisis when it rose as high as 1.99% in the fourth quarter of 2007, the quarter before the U.S. economy started contracting.

To us, the relative quiet in banking credit is a testament to moderating, but solid global demand supported by strong U.S. economic trends. Investors have endured several headwinds recently, including a prolonged U.S.-China trade dispute, geopolitical issues, and signs of slowing international demand. Still, we feel encouraged by U.S. economic data, and we attribute most of the weakness in global data to ongoing trade tensions.

“Even though the global environment has become more tenuous, companies’ balance sheets remain strong,” said LPL Research Chief Investment Strategist John Lynch. “We do not anticipate a recession in 2019, thanks to solid economic momentum and significant fiscal tailwinds.”

As mentioned in our Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets, we forecast global gross domestic product (GDP) growth of 3.7% and U.S. GDP growth of 2.5–2.75% in 2019. Although we are late in the cycle, this period can last for a long time, and we have yet to see the excesses or “red flags” (like a blowout in the TED spread) that have historically signaled economic peaks.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

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This research material has been prepared by LPL Financial LLC.

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1 year ago

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