Can you spot the odd one out in the Barclays Capital market snapshot below?
That’s right. On Tuesday, the 10-year US swap spread turned negative for the first time ever on record, according to Bloomberg data.
The wire put it down to rising demand for higher-yielding assets such as corporate and emerging market securities. As they explained it:
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 20.5 basis points today.
According to Barclays Capital, however, it’s a trend that’s unlikely to reverse any time soon.
The fiscal situation in the US, they argue, supports a 10-year swap trading range of between -10 and -15 basis points at least for the medium term.
Related links:
Swap rate falls below US Treasury – FT
Pricing risk redux – FT Alphaville
10-year swap spread turns negative – Self Evident
Beware, repo rates are on the rise - FT Alphaville