Friday, May 13, 2011
Time to once again to revisit swap spreads, which in the past have proven to be excellent leading indicators of major changes in the economy and financial markets. U.S. swap spreads have been trading at very benign levels for over a year now, suggesting that our financial markets are healthy, liquidity is back, and systemic risk is very low—all the conditions you would want to see for an ongoing recovery. The change on the margin that is interesting is coming from Europe, where swap spreads have been trending down all year, after rising last year over concerns that sovereign defaults (e.g., Greece, Ireland) could cause havoc among European banks and that in turn could translate into bad news for the economy. The level of euro swaps is still a bit elevated, but swaps are now low enough to suggest that sovereign debt restructurings (which increasingly look inevitable) do not pose a significant risk to the European banking system or to the economy.
Posted by Scott Grannis at 11:53 AM