Swaps (Mostly) and MBS and VOL

June 1st, 2009 10:15 am | by John Jansen |

Swap spreads are still under pressure. One derivatives veteran offered the interesting observation that the GM bankruptcy had led to the spread widening. The GM filing would have negated existing swap contracts. GM is (was) an active issuer and probably had been receiving from the street as they turned fixed rate issuance into floating rate debt.

With the bankruptcy filing those trades no longer exist and the street is left paying no one. Ergo the street is long. They have to pay swaps to hedge the exposure of that legally created long position.

There is also rate lock selling this morning .

Sources also note that there is residual paying by convexity types who now have a better handle on where they stand.

Finally, after the wild volatility of last week there is little liquidity as risk aversion is rising amongst  swap traders and it does not take much size to vibrate the market.

Mortgages are about three ticks better than swaps.

The three month 10 year ATM straddle is about 620 mid.

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