In the last 20 years, however, paper investments and derivatives of every kind have multiplied and flourished like kudzu under the Georgia sun. The TED Spread doesn t replace gold or silver hedges because it belongs to an asset class wholly distinct from them. However, it covers so many bases that every investor can benefit from holding TED Spreads to complement , but not to replace , precious metals in a crisis hedge portfolio. Eurodollars, on the other hand, are dollar liabilities of banks outside the United States. They re not as liquid as T-bills, not as good a credit risk, and are created and traded in an unregulated, uninsured market not subject to blocking by foreign governments.
Eurodollar CDs are only as good as the banks they represent.
In the face of these higher risks, Eurodollar deposits must pay higher yields to attract depositors. Changes in interest rates, whether caused by panic or inflation, tend to hit hardest on the short term sector where the maturities are shortest. Since both T-bills and Eurodollar CDs are short term instruments, the TED Spread benefits from a maximum fluctuation in rates. The TED Spread is a confidence barometer. When there s no crisis brewing, the spread tends to narrow.