Agencies and Swaps

April 23rd, 2009 12:11 pm | by John Jansen |

Agency spreads are unchanged in the 2 year sector and in the 5 year sector. Ten year spreads are a basis point wider.

Freddie Mac will price sometime today the 5 year note which they postponed yesterday because of the death of a senior corporate official. The price talk is T+65 which is about 5 basis points cheap to the FNMA March 2014 issue.

Swap spreads are narrower on the day.Two year spreads are flat at 63 basis points. Five year spreads are tighter by 2 basis points at 59. Ten year spreads are narrower by 1 basis point at 13. Thirty year spreads are ever more invertedat NEGATIVE 39.

The narrowest close in the trauma of last November for the 10 year spread was 12 1/2 so it is within 1/2 basis point of that level. It did trade as narrow as 9 in January.

Thirty year spreads are also closing in on local tights. The closing low in November on the 30 year was -59 and I think the only other close richer than current levels was at the -44 level in November,too.

There are several reasons for the tightness in swap spreads. There are still a host of end user types who need duration and as rates back up they choose to receive in swaps.

Why do they receive in swaps at these levels rather than buy the risk free 30 year asset. When one receives in swaps there is only an exchange of cash flows. If you need $1billion in 30 year duration in swaps you do not spend that amount of money. You agree on the notional and exchange the interest payments.

If one chooses to buy the cash bond,then that investor must part with $ 1billion of cash. Cash in this environment is still king and investors still wish to hoard it.

Ergo, the outperformance of swaps relative to cash.

One more reason. The bond business is in tatters. There are fewer players and there is less balance sheet available for those who would counter these flows. In the olden days there were quite a few relative valuse traders who would take the other side of these anomalies and warehouse the trade until it works. Those folks are scarce now and so there is no force to oppose seemingly abberant trading behavior.

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  1. 9 Responses to “Agencies and Swaps”

  2. By Brian on Apr 23, 2009 | Reply

    Thanks for the insight John, very helpful.

  3. By Felipe on Apr 23, 2009 | Reply

    Tips better bid today?

  4. By Bman on Apr 23, 2009 | Reply

    TIP auction went well

  5. By Brian on Apr 23, 2009 | Reply

    Bid to cover was 2.66 for the 5 yr auction…break even spread on the 10 yr has retraced back up in to the 140’s.

  6. By vol-trader on Apr 23, 2009 | Reply

    Nice post. That is some good info on swaps. Did you read the article about RV players in the journal yesterday? It basically said that there are c-notes lying around all over the place but no one is picking them up.

  7. By John Jansen on Apr 23, 2009 | Reply

    did not read that article. will check it out.

  8. By vol-trader on Apr 23, 2009 | Reply

    it was the heard on the street section on the back page on M&I

  9. By Michael Krause on Apr 23, 2009 | Reply

    Good explanation on the swap spread pricing. So perhaps the return of the 30 yr swap to normal richer (by interest rate) than treasury will be the ultimate indicator that liquidity and fear are back to normal.

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