for many months, weakness in shares of financial companies and deterioration in the credit markets went hand in hand. today's weakness in share prices is devoid of any condition in the credit markets that in the context of recent months could even be remotely characterized as worrisome. hence, the drop in share prices looks out of sync with the credit markets.
moreover, not only is the basis for weakness in share prices lacking in terms of the credit market story, it is lacking from the standpoint that there still is no evidence of deep impact from the credit markets on the economy. today's ism index is one example of the lack of such impact.
turning to the credit markets, there is no evidence of deterioration that would justify worry in the stock market. for example, the LIBOR markets have seen no change; the recent narrowing of spreads between LIBOR and fed funds remains intact and hence near a two-month low. second, swap rates -- which tend to rise when there are worries about credit spreads (because a debtor carrying a floating-rate obligation would be more inclined to swap into a fixed-rate obligation, driving the swap rate up) -- have been stable for months and remain well below the three major peaks set in august, november, and march. third, although bond issuance slowed last week to normal levels, it was mostly because of the impact of the memorial day holiday and the rise in market interest rates. moreover, issuance had been extraordinary for over two months, with two weeks during that period setting records at $45 billion, more than double the normal level of issuance. commercial paper rates are the fourth gauge showing normalcy, despite a modest turn higher in the past few days. spreads between commercial paper and fed funds remain substantially narrower than at their widest.
the recent rise in treasury yields and the rise in expectations for future interest rate hikes massively reinforce the idea that the credit markets are not to blame for the equity market's weakness. investors would not be leaning this way if they believed the intensity of the credit crisis had deepened again. just my opinion.