Friday, March 15, 2013

Swap spreads show no sign of trouble


A quick update of an important chart I've been featuring for years. Swap spreads are very important current and leading indicators of financial market health and the outlook for the economy. The fact that swap spreads in both the Eurozone and the U.S. remain relatively low and stable suggests that economic and financial market fundamentals are healthy, and thus we should expect growth rather than stagnation or recession. The Eurozone is not as healthy as the U.S., as many economies in Europe are in a mild recession, but things there are not deteriorating and ought to be slowly improving over the course of this year.

A short primer on swap spreads can be found here.

3 comments:

Gloeschi said...

Just like in 2007!

L.A. said...

Gloeschi you have again failed to interpret the chart! Spreads in 07 were already 2x the current level and entered a strong uptrend at least 6 months prior to the onset of the recession.

Tiho said...

I personally believe Gloeschi is right. From a contrarian point of view, equity buying opportunities occur when spreads in all credit markets spike to higher levels. That is when fear is present. Swap traders start pricing in a default / bankruptcy and as they discount the event, equity markets bottom.

On the other hand, when swaps are low, it is like the clam before the storm. The wall of worry has disappeared and complacency has taken hold just like early 2011 or early 2007. Obviously, right now there is "nothing" to worry, until there is...