For many months, weakness in shares of financial companies and deterioration in the credit markets went hand in hand. 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. This week's ISM index is one example of the lack of such impact. Hence, the risks for a negative feedback loop have not grown.

Turning to the credit markets, evidence is lacking of deterioration that would justify worry in the stock market. For example, there has been no change in the LIBOR markets; the recent narrowing of spreads between LIBOR and fed funds remains intact and hence near a 2-month low.

Tony Crescenzi
Senior VP,
Strategist,
Portfolio Manager
Pimco

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, which was more than twice the normal level of issuance. Commercial paper rates represent 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 wides.

Massively reinforcing the idea that the credit markets are not to blame for the equity market's weakness is the recent rise in Treasury yields and the rise in expectations for future interest rate hikes. Investors would not be leaning this way if they felt the intensity of the credit crisis had deepened again.

Only if there is a new sense that there will be negative feedback loops would there be a basis for renewed concern about the financial system.

The valuation of financials is of course not my baliwick, but if the basis for weakness is the idea that systemic risks to the financial system have grown, the basis is weak at the moment.

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Tony Crescenzi is the Chief Bond Market Strategist at Miller Tabak + Co., LLC where he advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the co-author of the just-revised "The Money Market" and "The Strategic Bond Investor."