One of the most reliable signals of market stress isn’t in the headlines—it’s in swap spreads.
Swap spreads measure the difference between what banks pay to swap interest rates (SOFR) and what the U.S. government pays to borrow (Treasuries). When that spread collapses, like it just did, something’s breaking.
In 2008, swap spreads collapsed before Lehman.
In March 2020, they broke again when the Treasury market froze.
Both times, the Fed stepped in.
This week, the 30-year swap spread hit a record low last week. Translation? Dealers are under pressure. Liquidity is vanishing.
Pension funds use swaps to hedge rates while keeping cash free for private investments. Banks hedge those swaps by buying Treasuries—but capital requirements limit how far they can go. When hedge funds unwind and banks can’t pick up the slack, liquidity evaporates.
This isn’t just plumbing—it’s the infrastructure behind U.S. debt issuance.
If this gets worse, the Fed doesn’t pivot because inflation is tamed. It pivots because the machine is breaking.
Watch bonds, not stocks. Buy gold. Sell dollars.
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