Negative Swap Spreads
Why would a swap spread be negative? What does that imply/say? For example the 30-year swap spread is now around -6 bp
Why would a swap spread be negative? What does that imply/say? For example the 30-year swap spread is now around -6 bp
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That says that the implied forward LIBOR rates for 30 years out are higher than the 30 year treasury rate.
Since the swap spread measures credit risk, this usually wouldn't happen, but from what I have heard from fixed income traders, there are technicals in the market driving this. To be honest, I don't remember what they are exactly. I think one of the technicals had to do with large pension funds demanding 30 year swaps for rebalancing...
Hope this helped a bit.
PIMCO had a piece on this that you could probably find through google.
Brown is correct, negative swap spreads means 30 year Treasury > LIBOR, which is unusual (mostly because Swap spreads are generally positive as a result of Treasuries being considered risk free and LIBOR being unsecured).
the main drivers are technical. pension fund bid, balance sheet constraints, and the hedging profiles of certain exotics desks.
but fundamentally i'm not so sure that libor is worse credit than the us gov't for 30 yrs.
haha, i have a us sovereign cds i'd love to sell you
you are not asking yourself what is behind each part of the swap.
It's not "mainly technical" at all it's entirely fundamental.
Ask yourself,
If implied 30 yr LIBOR his lower than 30 yr Treasuries, why?
Put another way, why would investors be more eager to borrow from the interbank market (which is global) than the US government?
Hint: last time I know of this happening on the short end of the curve was 9/11.
Don't be a jerk; a lot of this does have to do with mainly technical factors...like mortgage-rate fixing.
Jimbo is spot on here and to be honest if you've been around you know he is one of the most respected members of the board and has plenty of experience trading rates... 30yr negative swap spreads is entirely technical at the moment, anyone in the rates market knows this...
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