The two-year swap spread, which measures the difference between two-year swap rates and two-year Treasuries, has plunged 24 basis points to 125 basis points today, its lowest level since September 19th and 40 basis points below the peak set on October 2nd.
The drop is important because it indicates that market participants are betting that credit spreads will narrow. As a refresher, swap rates gauge the interest rate that a debt obligor (or speculator) pays to swap out of a floating-rate obligation into a fixed-rate obligation. Debtors do this particularly when they are unsure about their funding costs, a concern expressed wildly of late. (Crescenzi talks about other credit market signs with Jim Bianco and Kevin Ferry. See video)