Wednesday, March 19, 2008

credit spreads tighter

swap spreads, which measure the difference between swap rates and treasury rates, have tightened considerably following their third run-up since the credit crisis broke in the summer and the last two times this happened, the dow gained about 1,000 points. so far, so good on this front, in light of the dow's gain of almost 700 points off of monday's low.

credit spreads are tighter again today, as evidenced in part by the 10-year swap spread, which is trading at 59.75 basis points, down 2.75 basis points on the day. two weeks ago the spread was at 91.3 basis points, which was the highest level since the beginning of the 2001 recession.

high levels on the swap spread indicate that debtors are worried about credit spreads, compelling them to swap out of floating-rate obligations into fixed-rate obligations. hence, the decline in swap rates that has occurred of late indicates that debtors (and speculators) are betting on a decline in the cost of capital, which tends to be good news for equities.

No comments: