A Slow, Steady Credit Thaw

It appears from several leading indicators that credit markets are returning to something resembling normalcy. The two year swap spread has fallen below 60 basis points from a peak above 150 in Sep-Oct. The TED spread has also returned to normal levels from a similar spike. Both of these measures indicate that a good deal of uncertainty has been wrung out of credit markets.

The commercial paper market also appears to be stabilizing, according to recent Fed data. However, it’s important to note that the the current dynamics do not augur a robust economic recovery. As noted by CFO.com:

Sales by financial issuers were virtually unchanged, however. They fell by $5 billion the previous week. The total commercial paper market still is down from $1.82 trillion about four months ago and the peak of $2.2 trillion during the summer of 2007.

There’s a stock market adage that performance of the financial sector is indicative of how robust an economic recovery will be. It’s also widely accepted that credit market trends usually lead equity markets. Applying those principles to the evidence in hand, it seems likely that economic performance in the U.S. will be subdued for some time.

URLs:

http://www.bloomberg.com/apps/quote?ticker=USSP2%3AIND 

http://www.bloomberg.com/apps/quote?ticker=.TEDSP:IND 

http://www.cfo.com/article.cfm/12918406?f=alerts