As the market turns its head away from Europe’s deficits, it seems that it may increasingly be turning its attention back to the size of the US fiscal burden instead (potentially).
The latest evidence for this comes in the fact that after skirting around the zero level, the US 10-year treasury swap spread turned, ever so briefly, negative on Tuesday — for the first time since March this year (when European worries overshadowed most other market concerns).
Via Bloomberg:
Of course, while the 30-year swap spread has remained negative throughout the European crisis, the potential negativity of nearer dated spreads is seen as more worrying.
This is especially in light of Libor-OIS spreads normalising.
Of course, last time round, spreads as near dated as seven-years out went negative.
But while a negative swap-spread might be seen as indicating that Treasury yields are no longer a reflection of the true cost of risk-free borrowing — there is also one other explanation to consider.
Good old fashioned supply and demand fundamentals.
RBC analysts are among those warning that structural changes in the market are inevitably going to impact spreads in coming years.
As they noted recently:
The first is a shift in financial issuance patterns, which should keep 5- and 10-year spreads relatively tight. And the second is a dramatic move in repo rates that will come once the Fed begins its exit.
Related links:
Swooning canaries, exploding debt - FT Alphaville
The negative swap time-warp- FT Alphaville
Coming to America, Greece-style – FT Alphaville