Swap Spreads Speak?
In case nobody noticed... the 30 day T bill and GCF repo rate are both above the 10 yr note. Between yesterday 05/28 and 06/03, the treasury is auctioning $355B in notes and bills varying in duration from 4 weeks to 7 years. With 3X bid to cover now common, $1T will be tied up in the process. Think liquidity McFly. Month end DTCC GCF should spike.
Are Swap rates and spreads speaking? May 23rd, rates moved on elevated volumes viz. 200% of the avg over the last month. Spreads were uber active at 139% of avg, 5yr at 200%.
The curve bull steepened around the 2Y, with the 3yr making the biggest move -11.6 bps. During this fixed income rally, rates are now -29bps lower. Given the trajectory, there are -22 basis points of cuts priced in over the next four Fed meetings.
In other words, the market is pricing in the probability that the Fed changes rates by year end have gone from 15% to 70%, as in a 25 bps cut. Is that a mistake? As in, rates might go up despite any cuts? Moving West about what moves markets....
Looking beyond our spherical confines, the Mariana is dwarfed by the Ocean on Jupiter's Moon Europa (est. 62 miles deep), which might equate to the depth and liquidity of the Interest Rate Swaps market est. $327T with $170T USD denominated.
An interest rate "swap spread" is the difference in swapping floating rate (variable rate) interest to a fixed rate of interest, and allows one to tailor their exposure to interest rate changes.
Swap "spreads" approximate the difference between the yields on U.S. Treasuries and the interest rates on dollar swap contracts which are commonly misconstrued as a gauge or proxy for the borrowing costs of top U.S. banks.
The credit risk profile of a swap spread is different from a bond, and when bonds or HQLA are in short supply, it would seem to be the easy way out. Pay me now or pay me later? Forward swaps artificially create present "liquidity" for a future price.
10 yr Swap Spread (Rate minus 10 yr T) - note the 10 year dipping into negative territory again.
Why all this negative swap spread action? T-bills compete with government repo and reverse repo. Perhaps at the moment, banks want to maintain or shrink their balance sheets, as opposed to making loans in the repo market, read limited supply and capital constraints.
More to come in More Swap Spreads Speak? Stay tuned, no flippin.
Recommended reading:
Swap Spread Spike Signal?
Swap Spreads For Dummies?
Negative Swap Spreads FRBNY
Are Swap rates and spreads speaking? May 23rd, rates moved on elevated volumes viz. 200% of the avg over the last month. Spreads were uber active at 139% of avg, 5yr at 200%.
The curve bull steepened around the 2Y, with the 3yr making the biggest move -11.6 bps. During this fixed income rally, rates are now -29bps lower. Given the trajectory, there are -22 basis points of cuts priced in over the next four Fed meetings.
In other words, the market is pricing in the probability that the Fed changes rates by year end have gone from 15% to 70%, as in a 25 bps cut. Is that a mistake? As in, rates might go up despite any cuts? Moving West about what moves markets....
"The markets for Treasuries are the largest, broadest, and deepest in the world—the most liquid" - Alan S. Blinder 2013Speaking of the deepest liquidity and large elephant tracks... Danielle DiMartino Booth recently referred to the $5.4T bond market depth as deeper than the Mariana Trench (6.8 miles deep).
Looking beyond our spherical confines, the Mariana is dwarfed by the Ocean on Jupiter's Moon Europa (est. 62 miles deep), which might equate to the depth and liquidity of the Interest Rate Swaps market est. $327T with $170T USD denominated.
An interest rate "swap spread" is the difference in swapping floating rate (variable rate) interest to a fixed rate of interest, and allows one to tailor their exposure to interest rate changes.
Swap "spreads" approximate the difference between the yields on U.S. Treasuries and the interest rates on dollar swap contracts which are commonly misconstrued as a gauge or proxy for the borrowing costs of top U.S. banks.
The credit risk profile of a swap spread is different from a bond, and when bonds or HQLA are in short supply, it would seem to be the easy way out. Pay me now or pay me later? Forward swaps artificially create present "liquidity" for a future price.
Why all this negative swap spread action? T-bills compete with government repo and reverse repo. Perhaps at the moment, banks want to maintain or shrink their balance sheets, as opposed to making loans in the repo market, read limited supply and capital constraints.
More to come in More Swap Spreads Speak? Stay tuned, no flippin.
Recommended reading:
Swap Spread Spike Signal?
Swap Spreads For Dummies?
Negative Swap Spreads FRBNY
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