Swap Spreads For Dummies?

Summary

Discussion of negative swap spreads and liquidity implications on capital and asset markets.

Examination of influences on the swap spread "pool".

Examination of bond vs. swap instrument structure.

Discussion of the nature of swap spreads, scope and scale of the "pool".

In addition to the summary bullets above, we include this advisory on what insight potential investors might gain from the ensuing discussion. What follows is a discussion of a complicated macroeconomic issue.

In brief, this is the second chapter in a series of thematically-related missives which will attempt to identify the macroeconomic forces with a potential to pancake capital, commodity, equity, bond and asset markets six ways to Sunday. Today's focus is on a dearth of market liquidity, and we start our Nattering journey as a certain Ilene scribed me...

"Ilene doesn't understand swap spreads,

She says it's not because of the meds,

Thinks perhaps it's the Fed

So please have no fear

The Nattering One will make this all clear..."

Ah, yes, my swap spread muse, we shall endeavour and complete your poem...

...Swap Spreads For Dummies? is here.

Swap Spreads Turn Negative, Implications?

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.Some asset managers have entered into swap contracts to receive fixed-rate cash flows to hedge on the corporate bonds they either issue or purchase. Is this what really pushed swap rates below Treasuries yields? Or is there more than meets the eye?

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