Wednesday, January 7, 2009

Swap spreads correctly forecast improvement in corporate bonds (2)

I can't resist posting another update of this chart, since it's worked out so well. Swap spreads have been an excellent leading indicator of improvement throughout the corporate bond market. From the looks of the chart, there is still lots of good news to come.

This chart could be Exhibit A in the economy's defense: we are seeing some dramatic improvement in the underlying fundamentals which suggest that optimism, not Obama's pessimism, is the appropriate public policy approach.

3 comments:

j said...

Scott, you're the man!!!

brodero said...

Love your charts....could comment on the move in 2 swap spreads to S&P 500..is the treasury distorting this market to make this
relationship less correlated...

Scott Grannis said...

That's a question I would love to be able to answer. To begin with, though, I don't think the Treasury or the Fed is distorting the swap market. There has been a pretty consistent and broad-based trend in evidence for some time, all pointing to a reduction in fear and uncertainty, and a gradual return of confidence and liquidity to the markets.

The fact that corporate bonds have responded to this improvement in the fundamentals is not too difficult to explain or justify, but why stocks are not following through yet is not clear. Sometimes the markets move in mysterious ways, and sometimes the lags are long and variable. In any event, swap spreads are very much a fixed-income thing, and I would guess that equity investors are by and large ignorant of the importance of swap spreads.