The gap between the rate to exchange floating for fixed interest-rate payments for two years and similar maturity Treasury yields have dropped below the 10-year swap spread to almost the lowest level since before the start of the financial crisis.
The CHART OF THE DAY shows the gap between two-year and 10-year swap spreads at negative 3.3 basis points today, after reaching negative 3.8 basis points on April 8, the least since August 2007. The spread has averaged 20.1 basis points since Sept. 15, 2008, the day Lehman Brothers Inc. collapsed. It has been above zero most days since 2008, touching zero on April 3 for the first time since November 2010, indicating central-bank stimulus measures are aiding the global recovery.
“The canary in the coal mine at the start of the financial crisis could have been the inversion of the spread curve between two-year and 10-year spreads,” Ralph Axel, analyst in New York at Bank of America Corp., wrote in an e-mail April 22. “The spread curve has returned to a normal positive slope, the first time since August 2007. And banks are returning to more normal balance sheets and business functioning. Then you can start opening up the credit channels -- that’s the precondition for the opening of credit to consumer.”
In the 10 years ending August 2007, the month the European Central Bank extended $130.2 billion in loans to banks facing mortgage-related losses to ease the credit crisis, the gap between the two-year and 10-year swap spread averaged negative 18.7 basis points. It climbed to 94 basis points in October 2008 after the U.S. announced plans to rescue major financial firms, including Fannie Mae, Freddie Mac and American International Group Inc.