Swap Rates Speak?
Swaps are utilized by parties desiring to swap a stream of fixed interest payments which they pay to a dealer to receive floating or variable streams, or vice versa. So if you purchased or issued that corporate bond, you might buy a hedge or insurance in the form of an interest rate swap spread.
The “swap rate” is the fixed interest rate that the receiver demands in exchange for the uncertainty of having to pay the short-term say LIBOR (floating) rate over time. The “swap spread,” is the difference between the swap rate and the equivalent local government bond yield for the same maturity.
The balance of demand for pay-fixed and receive-fixed swap contracts determines fixed swap rates. Hypothetical, if enough asset managers or buyers of swaps want to receive a variable stream plus say LIBOR, they would pay a fixed stream and the dealers would raise fixed swap rates to receive the higher fixed rate cash flows. Translated, when it is anticipated that future rates will rise, swap rates rise.
Vice versa, if enough asset managers or buyers of swaps want to receive fixed streams, dealers would lower swap rates, thus lowering their payout. Translated, when it is anticipated that future rates will fall, swap rates decline.
5yr and 10yr Swap Rates - note the decline and widening since Oct 9, 2018 (anticipating lower rates) and the uptick since March 27 2019 (anticipating higher rates).
Above, joining Treasury yields and Eurodollar futures... an inverted swap rate curve with the 1 yr above all tenors up to 10 yrs. The 1-10 inversion started December 20, 2018, and the 1 yr was briefly above the 15yr March 22 - 29th.
Between Mar 27 and Apr 17 (when the carry kerfuffle started in the FX pairs), swap rates were rising (indicative of higher risk premia), since on the decline -20bps. With the decline in yields and swap rates, swap spreads 5 and 10yr have gone underwater again, as in negative to join with the 30. Not a good sign?
More to come in Swap Spreads Speak? Stay tuned, no flippin.
Recommended reading:
Swap Spread Spike Signal?
Swap Spreads For Dummies?
Negative Swap Spreads FRBNY
The “swap rate” is the fixed interest rate that the receiver demands in exchange for the uncertainty of having to pay the short-term say LIBOR (floating) rate over time. The “swap spread,” is the difference between the swap rate and the equivalent local government bond yield for the same maturity.
The balance of demand for pay-fixed and receive-fixed swap contracts determines fixed swap rates. Hypothetical, if enough asset managers or buyers of swaps want to receive a variable stream plus say LIBOR, they would pay a fixed stream and the dealers would raise fixed swap rates to receive the higher fixed rate cash flows. Translated, when it is anticipated that future rates will rise, swap rates rise.
Vice versa, if enough asset managers or buyers of swaps want to receive fixed streams, dealers would lower swap rates, thus lowering their payout. Translated, when it is anticipated that future rates will fall, swap rates decline.
5yr and 10yr Swap Rates - note the decline and widening since Oct 9, 2018 (anticipating lower rates) and the uptick since March 27 2019 (anticipating higher rates).
Above, joining Treasury yields and Eurodollar futures... an inverted swap rate curve with the 1 yr above all tenors up to 10 yrs. The 1-10 inversion started December 20, 2018, and the 1 yr was briefly above the 15yr March 22 - 29th.
Between Mar 27 and Apr 17 (when the carry kerfuffle started in the FX pairs), swap rates were rising (indicative of higher risk premia), since on the decline -20bps. With the decline in yields and swap rates, swap spreads 5 and 10yr have gone underwater again, as in negative to join with the 30. Not a good sign?
More to come in 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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