The Big Chill?

Today we take a quick look at how the big credit freeze of 2008 might be starting to thaw. Two quick points on items to watch.

1. The two-year interest-rate swap spread (the difference between the rate to exchange floating for fixed interest payments, for two years, and comparable U.S. Treasury yields). Why? This is a measure of what investors think about credit risk. It is interesting to compare this to the Baltic Dry Index, which provides insight into the costs of moving raw materials by sea, and subsequently is seen as a leading indicator of economic production. That the swap spread is used as an indicator of inter-bank lending risk is important to recall, as trade finance, or the lack thereof, has been one significant (although not the only) factor in the crash in global trade. The magnitude of the collapse in trade has been staggering: in May of 2008, the Baltic Dry Index was nearing 12,000.

Although we are dealing with a very short timeframe in the graph above, the negative correlation is interesting. We’ll see what’s to come in terms of trade, swap spreads before July 2007 were in the 40 bps range. Although the global recession is now much bigger than confidence in the interbank lending market, we’ll see if one impediment to trade lifts.

2. Mortgage rates in the U.S. have fallen significantly. As the chart shows, the 30-year fixed rate is nearing its lowest levels this decade. The purchase of mortgage bonds by the U.S. government is working in terms of making mortgages affordable and offering the opportunity for refinancing for beleaguered homeowners. As in global trade, access to a mortgage is but one part of the housing problem in the U.S. With all of the securitized debt tied to residential real estate in the market, a less weak housing industry (I don’t know how one can think of it in terms of “stronger”, at least in the short to mid term) would benefit a lot of balance sheets.