With 2-yr swap spreads being key indicators of systemic risk and liquidity in the banking system, it is nice to see that U.S. spreads are back to what might be termed "normal," as the second chart shows; the U.S. has effectively decoupled from Eurozone risk. It's also nice to see that Eurozone swap spreads continue to decline on the margin (first chart), even though they remain quite high. The ECB's ongoing efforts to inject liquidity into the banking system with its 3-yr LTROs have added much-needed stability to the banking system, which in turn allows the economy to function and buys time so that market participants can redistribute risk. But of course this does nothing to alleviate the underlying problem, which is too much debt in some Eurozone economies, and too little ability to service that debt, absent some major structural reforms (e.g., big cuts in government spending and entitlement programs). Still, it is progress.
The Fed's efforts to provide dollar liquidity to the Eurozone have also been helpful, as reflected in the decline of Euro Basis Swaps, which in turn have proved to be a leading indicator of systemic risk in general. As the chart suggests, we should see some further decline in Eurozone swap spreads in coming months.
2-year Italian and Spanish yields have declined significantly as a result of the improved liquidity conditions in the Eurozone. Ireland has benefited as well, but most of the improvement in the prospects for Ireland is due to painful but bold decisions last summer to implement needed fiscal reform (e.g., cutting spending). Greece of course has already defaulted, and Portugal remain quite likely to follow in its footsteps.