Interest Rate Roundup

Friday, August 15, 2008

Tension palpable in the credit markets

Sorry for the lack of posts over the last day and a half. Took a vacation day yesterday and been busy with other things today. I did want to pop in for a minute though and note that the tension in the credit markets is palpable these days. One indicator of something lurking beneath the surface? Swap spreads. They are widening noticeably today and getting close to their March highs. You'll find a chart of the 2-year swap spread from Bloomberg above.

What the heck is a swap spread? Why does it matter? I could try to write up a completely new explanation. But how about I just refer you to a 2002 Federal Reserve paper on swaps and swap spreads (PDF link) instead? It's entitled "Counterparty Credit Risk in Interest Rate Swaps during Times of Market Stress" and was authored by Antulio N. Bomfim. Suffice it to say that widening swap spreads are yet another indicator that credit stress and fear is running high in today's market.


  • Appreciate your blog. I am a Safe Money subscriber and enjoy your analysis. Have you started to considered what the bottom or turning point will look like? Your group has been calling this situation correctly way ahead of the market. Do you for see yourselves calling the "turn" that adeptly as well? Thanks

    By Anonymous Anonymous, at August 15, 2008 at 4:07 PM  

  • Great post, you are spot-on. Credit is a nightmare. Equities continues to whistle by the graveyard. I suspect the trend down in stocks will reassert itself soon.

    By Anonymous Anonymous, at August 15, 2008 at 9:06 PM  

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