Skip to main content

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.



Labels:

Popular posts from this blog

What history tell us about “Sell in May and Go Away”?

US stock market has experienced one of the best first four-month performance over the last four decades, produced 17.5% price return comparing to 19.1% in 1987. It is the third best price return for S&P 500 index since 1950; the top four-month performance belongs to 27.3% in 1975 as the stock market recovered from a severe bear market in 1973-1974 when the index nosedived more than 42% in two years. With calendar flipped into May and onto summer season of sun, beaches, most likely we would hear a lot of about old Wall Street saying “Say in May and go away” in the media. Moreover, primarily because of the unprecedented nature of speed and magnitude of the current market rally against the backdrop of weakening macroeconomic and corporate earnings backdrops during the period.  Sell in May and Go Way has delivered 6 times more return Historically, the six months between Nov-April frequently experienced extraordinary stock market performance than the six months between May to Oct...
Read more

MBS spread widen at historical levels

The turmoils at FNM and FRE created great anxieties and opportunities for both equities and debt TRADERS. The newly passed housing rescued packages by the Congress and signed the President essentially changed the "implied" to "explicit" US government backings on both quasi agency's outstanding debts. Their spreads to US treasuries have tightened in last few weeks. However, the most liquid 15 yr and 30 yr fixed MBS from Freddie and Fannie were under great pressures in last few days. Using 10 yr swap rate as benchmark, FNCI (15 yr Fannie MBS TBA) was priced to 5.50% with spread of 78 bps, that was 4 times of historical 10 year average (see the first chart). FNCI was traded at the cheapest level since 1998. The 78 bp spread to the swap was about four sigmas of the mean. FNCL (30 yr Fannie MBS TBA) was also trade at the lowest level that we have not seen in the last decade (second chart). Comparing to other investment alternatives, current fixed MBS prov...
Read more

Speculators Held Crude Net Short Positions First Time in 17 Months!

In my 7/8 post ( Just the beginning? ), speculator's futures and options contract positions were examined, it indicated that crude would begin long over due correction. I used speculator's futures contract positions this week to assess the indication of crude oil movement. US crude futures market had a very significant sentiment change based on this Friday's data from CFTC's release for market close 7/22. For the first time in the last 17+ months, "non-commercial" participants, or speculators held net short crude futures positions at NYMEX (see chart "Crude weekly price and speculator net crude futures positions"). The net short positions of 3,640 contracts were mainly caused by closing nearly 12,000 long positions and increasing over 14,000 short positions for the week. The total outstanding short positions for speculators stood at over 201,600, the second highest level (the highest level was 203,000, happened two weeks ago on 7/8) since the beginni...
Read more