Monday, October 6, 2008

Some good news

As stocks plunge, the VIX rises, and the TED spread rises to yet another all-time high (380 bps), here is one indicator of financial stress that recently has declined. 2-year swap spreads have dropped from an all-time high of 167 bps last Thursday, to 141 bps today. This may be a leading indicator of where the other indicators are headed, as this measure is the one most tied to the short-term health of the financial sector as a whole. Perhaps the Fed's liquidity injections are gaining traction, relieving fears of imminent defaults. 10-year swap spreads have fallen to 64 bps, below their 68 bps average of the past year and only slightly above their 58 bps average over the past 10 years (30-35 is considered "normal").

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