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Crescenzi: Signs of Thaw in Credit Market

Wednesday, 8 Oct 2008 | 2:49 PM ET

Three major segments of the credit markets are casting compelling signals today suggesting glimmers of light are peering through the darkness and investors are beginning to run towards them.

All of these signals are coming from reliable and steadfast gauges.

Specifically, Treasury yields are spiking higher, the 10-year swap rate is plunging, and Fannie Mae sold T-bills today at rates well below recent levels.

All of these signals suggest a movement toward risk taking. If 2-year swap rates follow these gauges and if Eurodollar and Euribor futures contracts begin to show signs that investors are betting on a decline in LIBOR, a substantial rally in riskier assets such as equities and corporate bonds will likely follow.

I stress that these short-term gauges—the 2-year swap and the LIBOR indicators—are essential for any lasting thaw in the credit markets, as improvements on these fronts would clearly indicate that concerns about near-term risks are subsiding. It seems likely that these short-term gauges will in fact show improvement given the massiveness of improvement in the three gauges I mentioned.

Exceedingly important is today's sharp rise in Treasury yields, which is massive. 10-year rates are up a whopping 27 basis points, for example, and 10s have registered a nearly 3-point decline. Such a move has been more characteristic of less-risky assets of late. (Check bonds here)

The 10-year swap rate has moved remarkably, partly because Treasury yields are up. The spread between 10-year swap rates, which reflect the interest rate that debt obligors pay to swap out of a floating-rate obligation into a fixed-rate one (they do this when they are worried about credit spreads), is down a whopping 16 basis points to 45.5 basis points, the lowest level since January 2006! (which is of course before the credit crisis bloomed last summer).

As for Fannie Mae's T-bill auctions, today's yield on 3-month bills was 1.55%, down from 2.35% last week and 2.95% two weeks ago. Fannie's 6-month bill yielded 1.84%, down from 3.19% last week and 3.40% two weeks ago.

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Tony Crescenzi
Tony Crescenzi

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 author of the forthcoming book, "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."Crescenzi is a contributor to RealMoney.com."

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