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Swap spread update




This chart updates the status of 2-yr swap spreads in the U.S. and the Eurozone. The situation is getting pretty intense in Europe, now that Italy is being put to the test. U.S. markets have finally reached the point (i.e., swap spreads above 35-40 bps) where they tell us that some market participants are starting to get worried that Eurozone troubles could spread to the U.S. The level of US spreads is still relatively tame, however, and all the recent indicators continue to suggest the U.S. economy is doing Ok, but Italy is such a big potential problem that it is hard to ignore. It wasn't too hard to shrug off a Greek default, but even the hint of an Italian default is enough to send shivers through the markets. I don't think we'll see an actual default, but when markets get like this then they can easily draw blood. Italy is going to have to do something meaningful to staunch the bleeding.

Markets in general are doing their best to send a message to countries with bloated governments: if you don't clean up your act, we are going to punish you. Markets can usually get their way, so I wouldn't be anxious to bet on an end-of-the-world-as-we-know-it scenario.

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