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Thursday, November 20, 2008

Up is Down... Down is Up

Swap spreads are currently trading through Treasuries on the long end of the yield curve. Not just a few bps, but 30+ bps.

What does this imply? It "implies" that investors are willing to lend to a counter-party (bank, hedge fund, etc...) at a lower rate than the U.S. government. While this isn't the reason for the inversion (I detailed back in October some technical factors that caused this), it still shows how distressed this current environment is.

How strange is this? Well back in October when the spread first inverted, we get this from the FT:

“Negative swap spreads have been considered by many to be a mathematical impossibility, just like negative probabilities or negative interest rates,” said Fidelio Tata, head of interest rate derivatives strategy at RBS Greenwich Capital Markets.

In this environment, nothing is impossible.