Swap Spreads 'holy tightening!', 2/27/2019, Ian C. Burdette, CFA, CMT

Outside of some anomalous behavior during the financial crisis, the absolute low registered print for 2yr swap spreads was in +3 context in early March 2016. I saw +6.875 this morning. The 'why' is likely complex: 1) dealer balance sheet, 2) OTR specialness, 3) new issue hedge related receiving, 3) shape of the UST and ED curves, 4) absolute nominal direction of USD Libor settings etc.. Swap spreads and Libor certainly don't have the same macro importance to markets that they once did for sure; however, that doesn't mean they are unimportant. I view this as just another indicator of stresses in the system. Swaps (aka Libor) are theoretically a AA credit instrument and should not invert - in theory. 2s/10s rate of rate is just 10.25bpts. Meaning the theoretical AA term structure (or premium) between 2s and 10s is just 10.25bpts, rate of rate. The current cycle tight was on 12/19/18 at, essentially, flat or NO term premium..

2yr Swap Spreads (bberg CMPN)


2s, 5s, 10s and 30s (red dash is zero boundary)


Ian C. Burdette, CFA, CMT
Senior Managing Director