Wednesday, March 24, 2010
This is a follow-up to my previous post. Yields on T-bond have jumped about 15 bps in the past several days, in concert with the plunge in swap spreads (the 10-yr swap spread is now down to -9 bps, and has fallen 13 bps since last Friday). This adds weight to the argument that negative swap spreads reflect a decline in demand for Treasuries due to the perception of increased default risk.
I might add that since negative swap rates mean that high-quality corporate yields are now lower than Treasury yields of comparable maturity, this is consistent with the view that the outlook for the economy is improving (because corporate profits are strong and the market's estimate of corporate default risk is down).
Posted by Scott Grannis at 10:56 AM