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10 Year Swap Spreads Turns Negative
Yet another Fed-dictated market aberration today as the 10 year swap spread turns negative. “It’s hedge-related activity related to new corporate issuance,” said Christian Cooper, an interest-rate strategist at Royal Bank of Canada in New York, one of 18 primary dealers that trade with the Federal Reserve. “As more and more institutions receive, then swap rates will go lower.” We expect that with ZIRP continuing in perpetuity, many more abnormal market phenomena will transpire, courtesy of Ben Bernanke increasingly dominating every aspect of capital markets. We have yet to see if this most recent foray into economic central planning by our central bank will, for the first time in history, prove to be successful.
More from Bloomberg:
The gap between the rate to exchange floating- for fixed-
interest payments and comparable maturity Treasury yields for 10
years, known as the swap spread, narrowed to as low as negative
0.44 basis point, the lowest since at least 1988, when Bloomberg
began collecting the data. The spread narrowed 3.38 basis points
to negative 0.38 basis point at 12:40 p.m. in New York.
A negative swap spread means the Treasury yield is higher
than the swap rate, which typically is greater given the
floating payments are based on interest rates that contain
credit risk, such as the London interbank offered rate, or
Libor. The 30-year swap spread turned negative for the first
time in August 2008, after the collapse of Lehman Brothers
Holdings Inc. triggered a surge of hedging in swaps. The
difference narrowed to negative 18.56 basis points today.
Debt issued by financial firms is typically swapped from
fixed-rate back into floating-rate payments, triggering
receiving in swaps, which causes swap spreads to narrow. An
increase in demand to pay fixed rates and receive floating
forces swap spreads wider, provided Treasury yields are stable.
Corporations that issue bonds also use the swaps market to hedge
against changes in interest rates that may result in increased
debt service costs.
Curiously, LIBOR has been ticking up consistently over the past month, making market participants wonder if all this is merely mortgage convexity hedging, or a more sinister anticipation of double dip economic deterioration as swap flatteners are put on.
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How could anyone anticipate a "double dip" now that there's a lifelong commitment by the "powers that be" to avoid it. Gosh, this cannot be possible.
So one may infer that U.S. Treasuries now contain more credit risk than the securities represented by the swap rate. As an example, we know that this is the case vs. Berkshire's debt.
What asset has greater credit quality than Treasury's, Canadian? Chinese? Australian? Nah, just not large enough. Investors believe you must go thru US first to procure safety. After that, it's likely all over anyway.
Are Warren Buffett's borrowing costs lower becasuse he owns a ratings agency?
No. Warren Buffet's borrowing costs are lower because on a scale from one to ten...he's delicious!
Off topic.
What happened to Rick Santelli? He has disappeared since his slap at SL.
he was put in to the re-education program - welcome to 1984
Central bankers have many tools at their disposal, and they are using them all to remove risk from the financial system. Like treading water, you can fight the inevitable for quite some time, but sooner or later, you're going down.
10 year swap spreads hate our freedom.
LOL
Last I heard, the 10 year swap spreads had been water boarded 183 times and they now admit to being behind this entire economic mess. I figured they were most likely guilty. They looked guilty.
Unfortunately the video tapes of these "interviews" were destroyed. But luckily we still have transcripts for your reading pleasure.
So this is where someone says...
RALLY ON BITCHES!
DOW > 15000
Cheers
Don't fucking tell me you can't arb this shit.
The world has gone fucking nuts.
if by arb you mean, apply leverage to a short bond position, offset by a better long position, then see: ltcm. if by arb you mean, produce a riskfree 3ML investment for 10 years, then yes
there is no such thing as riskfree 3ML for ten years. Most you can get is 3 month LIBID, after costs..and watch out for Tobin!
Well, the latter is the point... risk-free diff.
My point is that I can see the relative illiquidity of the 30Y being an issue. But the 10Y is a liquid instrument a big insurance company to hold in abundance anyway.
Seems like you'd be able to, especially with the liquidity in the 10y, but I also don't see why one would be unable to arb the 30y. Buy the T, sell the fixed side of the swap (cash flows then match), recieve 3m LIBOR quarterly. For the 30y you're then making 20bps for 30 years (30y T - 30y Swap Rate), plus 3m LIBOR. Of course, much like a negative basis trade, the "arbitrageur" is still exposed to m2m risk.
Did I miss anything?
You didn't miss anything in theory. In practice, the 30Y arb could blow up on you b/c the float is 3-month LIBOR derived. Fixed at 30Y @ poor liquidity gives heartburn.
I posted an article about the 30Y trade and had a pretty good discussion about it.
See comments on
http://www.zerohedge.com/article/guest-post-hedge-funds-turn-down-free-money-and-other-implications-negative-swap-spreads
The guy down below nailed it... payer swaptions.
Swaps have been below gilts at the long end of the UK for some time. The way to make huge amounts of money now (if the UK experience is any guide) is in TIIPS. These could price in break even inflation rates in excess of nominal rates. Soooooo put it on and please send me 10% of your huge profits. Just get in before Golden Balls!
Anyway, this is all so much more evidence of the twilight zone that goes for regulated interest markets. Remember when the free market could determine the most efficient way to distribute scarce resources? Well forget that, we know that Health has just been nationalised (nothing wrong with that if the private sector can't provide a solution to sickness); we also know that the housing market has been nationalised. GSE's are guaranteeing the vast majority of all mortgages. We also know that Homeland Security has guaranteed personal safety. The only thing between this and COMMUNISM is the guarantee of jobs provided by the Federal Government (pick forestry, health, police, barber shops, military).
Swaps yields (including CDS) are living proof that the markets have not quite got (i.e. understood the next shellacking to be inflicted on the productive sector by the Government/Financial sector) the next shoe to drop. That is Governments will soon be taxing the shit out of corporates with better ratings than Governments. What can a corporate do in the face of this Sovereignty threat? Well aside from eat shit (and die) they will get a worse credit spread. So check out JnJ and other credits that are also (in addition to swaps) yielding less than Governments and think about that!
This is more evidence of the pursuit of the failed Japanese model. Zombie banks eventually infect the productive sector and reult in Zombie corporates, with the Government running annual deficits of between 5 and 10% per annum, forever.
Well that is, until all credibility for the ponzi scheme (that goes for the best Government we as dumbass voters in a failed democratic system can come up with) and we turn into Zimbabwe, or China of the 1900's or Argentina of the 1980's etc etc.
Happy sleepwalking on the 35th floor of the empty building that couldn't afford to put in double glazing!
Financial venereal disease. The Fed gave us all the clap.
heyyyyyyy bloggers = house of trust..that mut be worth money! even if its fed dollars
http://www.businessinsider.com/chart-of-the-day-surprise-people-trust-blogs-more-than-they-trust-their-brokers-2010-3
Those holding swaptions = WIN
I don't think it so curious. The LIBOR should be substantially higher but the rumors about artificial manipulation by the London banksters has been persisting since 2008. I'll bet that all hell breaks loose the minute we see a 0.40% 3 month sooner rather than later and as that increases some serious panic coincides with the ARMs resets in June through November.
This thread is so above me, anyone care to explain this in simple terms (I know what LIBOR is at least and most of the terms). If not I'll just go back out to waiting on the porch. Thanks.
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