Swap Spreads

October 21st, 2008 11:34 am | by John Jansen |

Swap spreads are gapping tighter, too. Two year spreads have narrowed 5 1/2 basis points and five year spreads have narrowed 4 3/4 basis points. Ten year spreads are tighter by 6 basis points. The spread in the 30 year sector has narrowed 9 1/2 basis points and the 30 year swap rate is only 5 1/2 basis points above the benchmark Treasury.

The tightening in the 30 year spread has been driven by pension fund receiving and exotic derivative desk management of positions predicated on the assumption that the 10year/30 year swap rate (not spread ) curve could not flatten to this extent. Desks are short the 30 year sector and position management has them receiving to hedge exposure.

The problem is that one round of receiving begets another which begets another. So the price action in the long end of the swaps curve may produce some relationships which seem unwarranted but are motivated by the urge to survive and trade one more day.

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  1. 3 Responses to “Swap Spreads”

  2. By JLA on Oct 21, 2008 | Reply

    Any word from the Lehman swap settlement?

  3. By skeptonomist on Oct 21, 2008 | Reply

    “4 3/4 basis points”

    By my count has 180000/7 basis jargon points advantage over


  4. By Confused on Oct 22, 2008 | Reply

    Does anyone have any further insight as to why the 30yr swap spread is approaching zero once again?

    One explanation: Although treasuries don’t have counter-party risk with the government (at least not yet), there is a non-trivial risk in the repo market due to a fail occurring.

    Another explanation: LIBOR is not as reliable as it used to be, and this in turn is throwing the valuation of a swap off.


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