Credit spreads tighter

Credit spreads continue to tighten, mirroring a mood evident in the CBOE's VIX, the volatility index. For example, the yield spread today between Fannie Mae's 10-year note and 10-year U.S. Treasuries is 52 basis points, its most narrow since Jan. 29. The peak was 97.7 basis points on March 14.

Another good gauge of credit conditions is the 10-year swap spread, which tracks the rate paid over and above the U.S. 10-year to swap into a fixed-rate debt obligation from a floating one. The 10-year swap spread has had three distinct peaks since last summer; one in mid-August, one in late November, and then in early March.

Each peak was followed by a gain of more than 1,000 points in the Dow, a reflection of relative reductions in concerns about credit in each case. Today the spread is at 63 basis points, down half a basis point on the day and not far from this year's low of 58 basis points set on Jan. 15 (the peak was 91 basis points on March 6). This means that debtors are not as worried about the potential for wider credit spreads as they were previously.

Another gauge is the yield spread between the KDP High Yield index, which is comprised of 100 issues, and 10-year Treasuries. Yesterday the spread closed at 540 basis points, a decline of 145 basis points from the March 17 peak. Obviously this indicates that high-yield bonds have recently outperformed Treasuries.