Montreal, Canada

I have to admit that before the credit crisis erupted in August 2007 I didn't spend much time at all analyzing the inner workings of the credit market. Acronyms like SWAPS, CDOs and ABX barely made my daily regimen of global indicators. But that's changed markedly since 2007.

The credit markets hold the key to the health or destruction of the financial system. I think most investors would agree that what happened in the fall of 2008 was not a stock market-related panic but rather a credit freeze that eventually engulfed virtually all risk-based assets. Indeed, credit wags the stock market and not vice versa.

The stock market is considered a leading economic indicator. Usually, equities will rally or decline once the market has discounted an imminent recovery or slowdown. But other indicators within the equity space like dividends, price-to-earnings and price-to-book aren't exactly useful market-timing tools. A stock market advance or bull market can last years (e.g. NASDAQ in the late 1990s) before it peaks – despite trading at wretchedly absurd multiples.

Bonds, however, are smarter than stocks. And that's where I've always looked for clues on the direction of the broader markets.

One of the most useful indicators I track is the yield differential between two-year Treasury bonds and ten-year Treasury bonds. When long-term bonds yield less than short-term bonds we've got what's coined an "inverted yield curve." More often than not, an inverted yield curve is a bearish signal for risky assets as it usually discounts an economic recession. The yield curve turned negative in the summer of 2007 and accurately predicted the upcoming panic.

Right now, the yield curve remains positively sloped, meaning longer term rates are trading well above short-term rates. That differential stands at 2.8% this morning. With a yield spread like that banks and other speculators can borrow short and lend long – exactly the spread the Fed has engineered since the dark days of the credit crisis to boost banks' balance sheets and profitability.

But another important matrix among bond investors has turned bearish since last week.

The so-called swap spread basically measures the cost of borrowing funds in the LIBOR market less the cost of raising funds in government debt. That matrix or the "swap spread" has turned negative in the U.S. Treasury market since last week while remaining negative in the United Kingdom since February. Essentially, investors are placing a risk premium on sovereign debt in both Anglo-Saxon markets while according a premium to high-grade corporate debt.

Over the last 12 months in this space I've argued that at some point high quality corporate bonds would eventually command a premium to sovereign debt. That has begun.

British gilts, or government bonds, have been trading at a discount to high quality British corporate debt for more than a year. This means interest rates on top British corporate debt yields less than British gilts. It's also happening in Greece whereby the government must find billions of EUR every month to avoid a default. For the most part, blue-chip companies don't have a credit problem and, in fact, are sitting on hundreds of billions of dollars in net cash while some governments struggle to raise financing.

I can't be completely sure why the swap spread has turned bearish. I'm not a professional credit analyst nor do I spend the whole day monitoring intricate credit markets and spreads. Yet there is a sense of danger starting to build in the all-important credit markets once again.

As Gillian Tett of The Financial Times so poignantly illustrates (see FT, March 30, page 22) the "swaps spread swing does suggest that some investors are getting jittery. It also serves to underline that we do not live in normal markets right now. While the surface may look calm, the inner cogs of the financial system have been distorted by government intervention in ways that are still barely understood."

The credit crisis has not ended. Governments have placed a temporary cork on the inferno, which still must run its course. And that course will be ugly.