Friday, May 1, 2009

Swap spreads lead the way

I've been highlighting swap spreads as a leading indicator for all sorts of things over the past six months or so, and the results are in: swap spreads have indeed led the way for improvement in corporate bonds and equities. And they are forecasting continued improvement to come. Junk bond yields have fallen almost by half, but they can fall further as the economy stabilizes and then begins to grow. Credit spreads were predicting a depression and deflation just a few months ago, and now they are reflecting an economy that will likely avoid a depression, as well as the disappearance of deflation risk.

Full disclosure: I am long IVV, HYG, PAI, and EMD at the time of this writing.

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