Tuesday, April 23, 2013

Credit spreads point to continued growth

Swap and credit spreads have typically been good coincident and forward-looking indicators of systemic risk and the health of the economy. Currently they are showing no signs of any deterioration, and remain about as low as they have been at any time since the last recession. This strongly suggests that the U.S. economy is likely to continue to grow.


Swap spreads both here and in the Eurozone are relatively low. They were much higher in the runup to the last recession, and in the past few years they have increased from time to time due to concerns about the threat of sovereign default risk in the Eurozone. Currently, however, they show no signs of any unusual sources of risk to the economy.


Credit default swap spreads are still elevated relative to where they were in early 2007, but they are as low as they have been at any time since the last recession. There is no sign here of any impending economic weakness or threats to the future cash flows of large corporations.

16 comments:

Gloeschi said...

Yep, absolutely no clouds on the horizon. If you disregard implied default probabilities for Greece (92%), Argentina (73%), Cyprus (61%), Venezuela (41%), Egypt (33%), Portugal (28%).
Clear skies!

Oeconomicus said...

Scott-

Is there another location besides Bloomberg that can be used to calculate swap spreads? Any official government data perhaps?

Thanks

Scott Grannis said...

Re: swaps. There is most likely another source of swap spreads, but it would probably be from a paid source (e.g., Reuters?).

Jim said...

Thanks for sharing your work Scott, very much appreciated. Question for you. When do you see interest rates rising here in US? For TLT, do you see a longer term decline starring soon? Thanks for any thoughts. Jim P.

Scott Grannis said...

I've been expecting interest rates to rise for several years and I've been dead wrong. I keep thinking that it is much more likely that rates rise than that they fall. But the timing is difficult to pin down. Rates will rise when the Fed becomes more optimistic about the economy, and/or when the market becomes more optimistic about the economy. Rates are very low now because both the Fed and the market are very pessimistic about the economy's prospects.

Jim said...

Thanks Scott. I too game had similar (false) expectations of rate rise over past two years. But if stock market is correct at these levels, then we should be getting closer in time to point at which a sustained rise in rates will begin. Your focus on economic strength measures. are also supportive of higher rates. Watching for a rally in emerging markets to indicate reflation. If so, should also mark a rise in interest rates.Best Regards, Jim P.

Gloeschi said...

@ Oeconomicus: For those of us who are not retired AND have a Bloomberg terminal (???) go to research.stlouisfed.org and substract the 2-year swap rate (WSWP2) from the 2-year constant maturity Treasury yield (DGS2).

The Roller said...

Even though career politicians had to come in at the last minute and stick their corporate shakedown noses into it all, Scott Grannis has provided more proof positive that Henry Paulson as Treasury Sec was a genius.

Cheers.

William said...

Henry Paulson - genius??

I think that it is more likely that the genius behind that various plans was Bernanke the a scholar of the Great Depression and Japan's deflation trap after 1990. And also Tim Geithner, the experienced international financial crisis manager.

The US was very fortunate to have these very knowledgeable and experience hand on deck. Paulson as the recent CEO of Goldman Sacks has no special knowledge of these issues other than what was good for Goldman Sacks.

steve said...

scott, any comments re this piece?

http://www.american.com/archive/2013/april/the-federal-financial-triangle

Scott Grannis said...

steve: I've written about this several times in the past:

http://scottgrannis.blogspot.com/search?q=fed+hedge+fund

It's certainly worrisome, but it is not necessarily a disaster waiting to happen. The Fed doesn't need to mark its portfolio to market. All that matters really is its cash flow, which is now quite positive. They can sustain a pretty big rise in interest rates, which would happen only if the economy were to improve dramatically. So Fed losses would be offset by economic gains.

steve said...

I gotta tell scott, there's a fly in the ointment here. clearly we've seen economic growth over the past several yrs. by your own admission, the reason interest rates remain low is pessimism about the future. we could certainly see the reverse happen; optimism picks up while growth remains tepid. then interest rates rise while no offset with growth and the fed will be in a real pickle.

Rob said...

Scott can you give us your take on the latest Apple results ? Thanks !

Scott Grannis said...

Re: AAPL. With AAPL's cash-adjusted PE now trading around 6, I think the market is way too pessimistic about the company's prospects. I haven't seen anything in the recent earnings report that would justify this degree of pessimism. So I remain very optimistic about the stock.

Rob said...

Thanks. And this biggest share buyback in history, do you think buy backs are a useful way to deploy capital in general ?

Rob said...

An article on Apples proposed share buybacks and why they dont seem to be very well thought out or communicated, in contrast to similar moves by Warren Buffets company:

http://www.bloomberg.com/news/2013-04-25/what-apple-can-learn-from-warren-buffett.html