Friday, September 30, 2011

Swap spread update (cont.)

By popular demand, I show here a long history of 2-yr and 10-yr swap spreads. The reader may judge for himself how good these spreads are at capturing systemic risk and anticipating recessions. And, of course, to what degree spreads today are pointing to a double-dip recession.



7 comments:

Bill said...

Scott,

Hasn't ECRI a pretty good track record on calling recessions? Is there something about their analysis this time that differs from previous calls?

seekingtraceevidence said...

Another excellent note. The lack of severe levels indicate that like other economic indicators no recession is near. Market is quite cheap!

Benjamin said...

Looks good. But we are seeing very slow growth, and may be hitting neutral right now. The Fed needs to let people know it is targeting a growth rate of 7 percent on the nominal GDP.

Phil Boyer said...

Scott,
Have been keeping an eye on US bank CDS pricing to help asses systematic risk? The cost of insuring US bank debt has skyrocketed. Any thoughts?
Thank you.

Scott Grannis said...

Bill: Re ECRI, their method is fairly mechanistic, and as such I think it leaves them vulnerable to making mistakes when unique circumstances present themselves, such as what he have today in Europe.

Senta said...

Mish has a good article on ECRI's missed call on the 2007 recession.
http://globaleconomicanalysis.blogspot.com/2011/09/ecri-calls-recession-based-on-contagion.html

Pragmatic Investor said...

Really can't see much connection between swap spreads and economic cycles from the charts. Looks like swap spreads are a lot more correlated with interest rate levels and global events. If you overlay interest rate levels on top of the swap spreads, you will see that as interest rates move lower, spreads compress. As rates move higher, spreads widen. And spreads spike higher as response to global risk events like gulf war.

Swap spreads were actually trending down prior to the 1990 and 2000 recessions. If they were leading indicators to recessions, they would have been moving up.