Another thing almost back to normal

Way back in November I pointed out that 10-year swap spreads had almost returned to "normal" levels and that this was an excellent portent of improvement in other things. As a follow-up, I offer this chart of 5-year swap spreads, which are also now almost back to normal. The nightmare of the past year or so is rapidly fading into the past. This is simply excellent news, and it means there is more excellent news to come. The fixed income market is recovering its health and its liquidity. The Fed's willingness to supply money by the bushel has helped, but it is also important that asset prices have gone through a tremendous adjustment process. The bulk of the losses from subprime and subprime-related exposure have been recognized and absorbed.

This is not about Obama and any promised fiscal stimulus package, this is all about how free markets can, with time and some assistance from the Feds, fix themselves.

I hasten to add that the Fed was a big reason we got into this mess, and erratic monetary policy was a key driver of the extreme volatility of asset prices in the past year. But at least they have done what was needed—supply money by the bushel to meet the market's demand for it. The next chapter in this story will be all about how the Fed takes the money back as the markets melt up.