The world is intent on announcing a “new normal”: a new post-crisis age where there isn’t a housing bubble, where stock markets don’t run ahead of themselves, where consumers are more careful and where financial risk isn’t mispriced. Until it discovers this “new normal” is really the same old.
It still hasn’t come to that but, sometimes, there are signs that nothing has changed.
Data last week from the US— the epicentre of the last boom and bust—suggests some optimism. Consumer confidence numbers released this week were better than expected, rising from 46.4 in February to 52.5 in March. A key US home price index rose for January this week, the eighth straight monthly increase. And stocks the world over are rallying: The Dow Jones Industrial Average has been flirting with the psychologically powerful 11,000 level.
Perhaps this indicates a genuine recovery, but there are concerns of risks creeping in, too. Last week, US bond markets were trading Warren Buffett’s debt at lower rates than US debt. If this is more than a one-off case, it’s astonishing: Sovereign yields, or interest rates, are the lowest in the market—governments are more risk-free than firms.
A more consistent signal comes from the US swap market. The interest rate swap in question, where fixed rate payments swap with floating rate ones, is based on the London interbank offered rate, or Libor, at which firms can borrow. Because this swap reflects corporate risk, it usually yields more than—and trades at a “spread” above—a government bond with the same maturity.
The 10-year swap spread last week had turned negative; this week the seven-year did too, meaning these swaps now trade below treasurys.
Just as Asian savings pooled into US assets last decade drove interest rates down, mispriced risk and convinced people to invest in riskier mortgages, we wonder if the current market will make corporations and emerging markets appear safer.
After all, like that glut of savings, the US now finds itself in a deluge of debt, thanks to enormous fiscal and monetary stimulus. And who knows exactly how the government floating too many bonds or the Fed buying too many mortgage securities (as part of its quantitative easing) has affected markets.
Extended for long, this stimulus may well be preventing necessary market corrections, stoking a boom—not unlike last decade’s—that can again go bust.
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