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There are many TEDs, but the TED in FRED is a spread. That is, the spread between the 3-month LIBOR and the 3-month Treasury bill.

A little background: LIBOR is the rate banks would charge each other for lending, which can be used to measure economy-wide credit risk. Treasuries are basically the safest assets on the market. So, a large TED spread would indicate a lot of credit risk in the U.S. economy.*

But how large is a typical TED spread? At the time of this writing, it looks like it’s about 30 to 40 basis points (0.3 to 0.4%), which is mid-range for recent years. It was up to 57 basis points in 2012 and below 20 on several occasions. A longer historical perspective shows that in times of crisis the TED spread really rises. Use the slider below the graph to change your sample period: The October 1987 stock market crash raised TED spreads close to 300 basis points, and the financial crisis of 2008 raised them to 450 basis points. Considering the whole sample, current conditions actually look pretty good.

*A side note: The TED spread is always going to be positive unless the risk on Treasuries increases much more than what current credit conditions warrant. This scenario could be caused by an increased risk of (partial) default by the U.S. government while credit conditions for U.S. banks remain unchanged. That’s unlikely to happen.

How this graph was created: Search for “TED spread” and you have your graph.

Suggested by Christian Zimmermann

View on FRED, series used in this post: TEDRATE

Dating the financial crisis using fixed income market yield spreads

How would you answer the question, “When did the Great Financial Crisis begin?” Some date the beginning of the crisis according to the events surrounding the failure of Lehman Brothers in mid-September 2008. But at that point, financial markets had already been in turmoil for more than a year, as certain time series from the summer of 2007 show. So how do you date the crisis?

One way to date the recent financial crisis is to identify significant breaks in the dynamics of yield spreads from U.S. fixed income markets (thought to be at the core of the crisis) using appropriate statistical techniques, like I do in a forthcoming article (working paper version) along with coauthors Massimo Guidolin and Pierangelo De Pace. With a particular definition of financial crisis in mind, this procedure allows us to identify the weeks of August 3, 2007, and June 26, 2009, as the beginning and the end of the crisis, at least from the perspective of fixed income yield spreads.

While some of the spreads we use are based on proprietary data, several can be constructed from FRED data. In the graph, we plot the spread between Moody’s seasoned Aaa corporate bond yield and Moody’s seasoned Baa corporate bond yield, as well as the spread between the 30-year fixed-rate mortgage average in the United States and the 30-year Treasury constant maturity rate.

Even just eyeballing the graph gives a sense of the degree of comovement of these spreads at least for the period beginning in 2007. Moreover, the spreads show an upward shift in their level approximately in the second half of 2007 as well as a downward shift approximately in mid-2009.

How this graph was created: In FRED, enter “Moody’s” in the search box. This will return a few Moody’s series: I first selected the Baa corporate bond yield and then added the Aaa corporate bond yield. The spread is then the difference between the two: a-b. A similar transformation was applied to the 30-year Treasury constant maturity rate and the 30-year fixed-rate mortgage average in the United States.

Suggested by Silvio Contessi

View on FRED, series used in this post: AAA, BAA, DGS30, MORTGAGE30US

Discrepancies in dating recessions

Illuminating the shaded areas on the graph

There’s no hard and fast rule for determining when the U.S. economy has entered a recession, and there’s no one indicator that determines a recession.

The National Bureau of Economic Research (NBER) Business Cycle Dating Committee defines a recession as a significant decline in economic activity spread across the economy and makes that determination by considering numerous indicators of economic activity. They date a recession from the peak of a business cycle through its trough. Most recently, the committee identified February 2020 as the last business cycle peak and April 2020 as the business cycle trough, making this the shortest recession on record—just 2 to 3 months.

While the beginning and ending months of a recession tend to get a lot of attention, the committee also releases the corresponding quarters of the peak and trough. These turning points are primarily based on quarterly averages of the monthly indicators along with prominent quarterly series such as real GDP. In most instances, the turning point quarters match the turning point months. In fact, the months and quarters had all been in alignment since March (Q1) 1954.1 But for this past recession, the months and quarters of the business cycle turning points do not align.

Again, as far as the monthly turning points go, the most recent business cycle peak was in February 2020 and the trough was in April 2020, implying the only month the economy was clearly in a recessionary state was March 2020. Some time in February, the economy moved from expansion to recession; and some time in April, the economy moved from recession back to expansion.2

For the quarterly turning points, the committee determined that the business cycle peak occurred in the fourth quarter of 2019. This is consistent with the –5.1% decline in real GDP in the first quarter of 2020, but not in alignment with the monthly peak in February 2020. Moreover, the steep decline in employment in March 2020 more than offset the gains in January and February, generating a quarterly decline in employment of over 900,000 jobs (see the FRED Graph above).3

Shaded areas indicate U.S. recessions

Frequent FRED users are familiar with the phrase “Shaded areas indicate U.S. recessions” in the bottom left-hand corner of their FRED graph. You can see this shading below in the FRED graph of the unemployment rate, which also appears on the committee’s web page, with a nod to the St. Louis Fed. The recession shading is a useful visual tool for interpreting economic data. In this case, we can see that the unemployment rate rises during a recession and tends to reach a peak a few months after the recession ends.

The FRED team applies recession shading starting with the month of the peak and ending with the month prior to the trough. This method has most accurately aligned with the turning points in economic data because of the consistency between NBER turning point months and quarters: As noted above, NBER turning point months and quarters have aligned for over a half-century!

Of course, this shading technique is not perfect and things change. The recent discrepancy between the monthly and quarterly turning points may generate some confusion when examining recent data. Rest assured, all the data behind these shaded areas do exist in FRED; and for those users who want to fine-tune their graphs, the series are here.

1 The committee, which dates back to 1894, has identified 68 business cycle turning points; 13 of the turning months and quarters do not align.
2 Currently, daily or weekly economic indicators aren’t robust enough to make this determination. Stock indices, for example, are forward looking; so, turning points in equity prices don’t always correspond with business cycle turning points.
3 This NBER press release discusses the discrepancy in household employment depicted above and nonfarm payroll employment (PAYEMS).

How these graphs were created: For the first graph, search FRED for “Employment Level” and select the series “CE16OV.” The default graph will be a monthly graph of the employment level in thousands of persons. To change units, go to the “Edit Graph” panel: Under “Units,” select “Change, Thousands of Persons.” Next, to add the quarterly employment level, use the “Add Line” tab to search for “Employment Level” and select the series “CE16OV.” Next, under the “Edit Lines” tab, click the “Edit Line 2” button to change the units and frequency. Under “Units,” select “Change, Thousands of Persons.” Then, under “Modify frequency,” select “Quarterly.” Next, under the “Format” tab, select “Off” next to “Recession Shading.” To add marks to the lines, select “Circle” under “Mark type” next to each line. Return to the main graph. Use the date range boxes to set the beginning date to “2018-09-01.”
For the second graph, search FRED for “Unemployment Rate” and select the series “UNRATE.” The default graph will be a monthly graph of the unemployment rate as a percent.

Suggested by Chuck Gascon.

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