Wednesday, December 10, 2008

More signs of healing

The spread between the yield on 5-year FNMA debt and 5-year Treasuries has narrowed significantly since its peak on Nov. 20th, which not coincidentally was the low point for the equity market. I think this is one more sign that the bond market is continuing to heal itself (with help from the Fed of course). Panic selling has subsided, as investors are feeling less worried about the possibility of Freddie and Fannie defaulting on their massive debts. There is still plenty of room for things to improve, of course, but this is very important progress on the margin. And as the bond market slowly heals itself, confidence is slowly returning to the equity market as well, with the S&P 500 trading 20% higher than its November lows, and all markets apparently able to shrug off bad news. That's very good news indeed.

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