Monday, January 5, 2009

Another Post on Swaps????

I admit it... I've posted WAY too much about swap spreads, but in my last post on the subject of the 30 year swap spreads (defined here), I received this comment:

Not sure why this is considered good or bad. Seems indifferent to me as banks are basically an extension of the Fed balance sheet and federal government for all intents and purposes now. This doesn't have any impact on credit to the real economy. Just filling in holes of the banks balance sheets.
How's this for importance? For the past 8 years (I could only find data going back 8 years) 30 year swap spreads have followed equities with alarming regularity (I smoothed the changes by averaging the change over the past month):

HOWEVER, over the last month, 30 year swap spreads have rallied significantly more than the equity market.

Will swap spreads lead the market higher or should we view this recent rally in credit markets as short-lived? Or should we ignore it altogether. Interesting post at Infectious Greed about just that. According to Paul:
The risks of financial history are higher than ever though. We have more data, better analytical tools, and more people crunching the data, so we can expect to see data on pretty much anything we want to see. There will always be someone tearing apart something to find something interesting, so something interesting will be found. My friend James Altucher has always been great on this subject, ripping holes in pretty much every data-driven rule of thumb by which people claim to trade and/or find market tops and bottoms. They mostly don’t work.

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