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Negative Swap Spread

One of most intriguing event, which barely got any attention in the market, was that, for the first time in the history, 30 year USD swap spread dropped into negative territory today. The US treasury 30 year bond traded at 4.027% and the same maturity US dollar swap traded at 4.051%, i.e, 30 year swap spread was about -2.4 bps (see attached Bloomberg chart below) . The 30 year swap rate only go back to early 1994 in Bloomberg data base, in the last 14 years, swap curve was always and should traded at discount to the treasury benchmark, "risk-free" bogey. So what is mean for the equity and credit market? Or most importantly, is the swap market trying or pricing the much deep recession or an early signal of Japanese-style deflation market has feared in 2003? Is the US treasury credit quality put into challenges? Or just the abnormally due to temporary market forces? Isn't the market facing the greatest CREDIT crisis we ever face since the Great Depression? Should we expect credit spread widening?
Short end part of swap curve behave just opposite to the long end, 2 year swap spreads jumped to the peak about 160 in early Oct and have narrowed in last two weeks reflecting credit alleviation due to "Bern & Paulson" efforts. However, the short end spreads are still at the extreme and indicated credit stress conditions. The second Bloomberg chart illustrates this contradictory market of long vs short swap curve movement. If there is anything we can bank on, it sure looks like abundant opportunities if you have the appetite for risks.



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