Swap Spread Spike Signal?

Summary

Examination of last weeks 5 and 10 year swap spread spike.

Discussion of swap spread utilization and market liquidity conditions.

Discussion of potential Treasury debt paydown effects on markets.

Discussion of forward derivatives potential effects on the dollar, commodities, global equities and bond markets.

In a conversation with a friend on Nov 4th we Nattered. "Take a look at five and ten year US swap spreads, NEGATIVE in the extreme, not a good sign."

On too many occasions to remember, in past missives, I have Nattered about ill-liquidity, the dollar squeeze and the havoc it will wreak on commodities and equities markets.

Above note, 10 year swap rate minus 10 year constant treasury rate at -0.17% 

Needless to say, ZeroHedge is also hot on the trail of those swaps. "The exact reason for the sharp move is unclear but blame has been placed on high corporate issuance, balance sheet re-pricing into year-end given tighter regulatory pressure and also the poor liquidity." -ZeroHedge

Being a data ferret, we dig deeper and find: "Banks and investors say the moves exemplify constraints on dealers' balance sheets, unable to facilitate the reversal of the dislocation due to hefty capital charges for doing so. Another trader says it is indicative of a bank or hedge fund hitting a limit on a position and having to suddenly liquidate into the market." - FT

Constraints and hitting position limits are symptoms. One of the causes is in the form of Gozer the Destructor who is lurking about, aka King Dollar which just hit 98-99 and is taking a break before hitting new highs. Just hitting 99 caused a massive surge in credit spreads as position limits were hit and carry trades had to be liquidated into an ill-liquid market. And there IS ANOTHER cause...

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