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gill


Total Posts: 186
Joined: Nov 2004
 
Posted: 2017-02-07 13:27
Hello,

Could someone explain pls the difference in the US swap rates vs treasuries at the short end of the curve?
I find it difficult to beleive that it's all due to the credit risk premium.

Thank you in advance!

sigma


Total Posts: 105
Joined: Mar 2009
 
Posted: 2017-02-07 21:40
Isn't it a matter of supply/demand effect? There is higher demand to pay fixed for short and medium dated maturities (so the swap spread is positive) and higher demand to receive fixed for longer dated maturities (so the swap spread is negative starting from 7y).

It makes sense in the environment when short rates are expected to rise because of FED tightening but longer dated rates are expected to fall because of potential slower growth and inflation.

mtsm


Total Posts: 179
Joined: Dec 2010
 
Posted: 2017-02-07 22:25
Not sure what you mean by short end of the curve in the context of swaps vs treasuries? Capital markets kick in around 2y or longer. Typically the notion of the front end I have is <2y, but I gotcha.

I personally think that trying to explain any basis is somewhat elusive, which doesn't mean you should not try. No basis I am aware of is due a single textbook effect. It's certainly not the case of the basis you imply. In that sense everything is supply and demand driven, hah.

chiral3
Founding Member

Total Posts: 4969
Joined: Mar 2004
 
Posted: 2017-02-07 23:01
Agree with mtsm. I wouldn't compare the two at the short end. FED, Libor, USG, repo. In this sense borrowing from the gov't should have less credit risk than interbank. For bootstrapping maybe picking up swap at 1y, but things are more meaningful (USSP) at 5, 7, 10, 20, 30.

Most calls are for USSP7-20 > 0 by year-end, with USSP30 hanging on.

Nonius is Satoshi Nakamoto. 物の哀れ

gill


Total Posts: 186
Joined: Nov 2004
 
Posted: 2017-02-08 09:39
Thank vm you for your responses! Yes I meant 2Y bucket.

Martinghoul


Total Posts: 834
Joined: Oct 2008
 
Posted: 2017-02-08 10:58
If you want an old, somewhat dated paper that discusses the theoretical underpinnings of US swapspreads, I can send it to you. Obviously, some of the things discussed have changed, but, to my knowledge, it's one of the very few attempts to put together a framework.

Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness...

gill


Total Posts: 186
Joined: Nov 2004
 
Posted: 2017-02-08 14:30
Will vm apppreciate it!

trader_credityahoocom

avalz


Total Posts: 1
Joined: Feb 2017
 
Posted: 2017-02-10 10:22
any chance i could have that paper too? albertovalzolghergmailcom

thanks!

Martinghoul


Total Posts: 834
Joined: Oct 2008
 
Posted: 2017-02-10 10:56
Sorry, this is a dupe... Pls delete.

Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness...

Martinghoul


Total Posts: 834
Joined: Oct 2008
 
Posted: 2017-02-10 10:56
Please do keep in mind that it's old and, like I mentioned, some bits they discuss are rather out of date. So caveat emptor...

Actually, wait, it's actually available publicly here:
World Bank OKR

Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness...

chiral3
Founding Member

Total Posts: 4969
Joined: Mar 2004
 
Posted: 2017-02-10 14:07
I only quickly read the conclusion of the paper, which I may have read once, but it isn't ringing a bell. I think that the composition of the FED balance sheet - with QE assets rolling off, and the fact that FED may need to start buying TSY in ca 2019 to match their liability (impacts to off-the-run supply?), which is on target for $2T in 2020, MBS reinvestment, higher rates, and higher IG issuance - factor heavily.

What I didn't see in the conclusion (and may be in the broader paper) is that swap benefits from artificial CE since bond principal can't be lost and credit risk, traditionally through CSA, now through central clearing, is low to non-existent. This upends the old adage that, because swap is inter-bank, it's "AA-like".

Nonius is Satoshi Nakamoto. 物の哀れ

Martinghoul


Total Posts: 834
Joined: Oct 2008
 
Posted: 2017-02-10 16:04
As I mentioned, this is an old paper and there are lots of things in the modern world which are different. Obviously, the biggest elephant in the room is the set of regulatory developments that have occurred since the crisis (which, incidentally, might not be long for this world).

This, IMHO, is what swap spreads are mostly about at the moment...

Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness...

chiral3
Founding Member

Total Posts: 4969
Joined: Mar 2004
 
Posted: 2017-02-10 17:34
I'm not knocking the paper Martinhoul. Good papers on swap spreads are like Tasmanian Tigers - there's a sighting once every decade. Thanks for posting.

Nonius is Satoshi Nakamoto. 物の哀れ

Martinghoul


Total Posts: 834
Joined: Oct 2008
 
Posted: 2017-02-13 11:33
No worries, chiral...

I agree with you. These papers, especially ones that don't lean too heavily on the "no arbitrage" logic are rare. Moreover, I know one of the authors personally and she's great.

Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness...
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