Thursday, December 18, 2008

Who Wants to Receive 2.5% / Pay LIBOR for 30 Years?

This is an update of a previous post (for full details of the technical factors go to that link).

Across the Curve details:

Swap spreads moved wildly. The 2 year spread narrowed 6 basis points to 82. Three year spreads tightened 7 ¼ basis points to 76 ¾ basis points. Five year spreads narrowed 1 ¼ basis points to 70 basis points. Ten year spreads moved wider 17 basis points to 17 ½ basis points. Thirty year spreads widened 20 basis points to NEGATIVE 22.

While a ~50 bp rebound in this measure over a few days is BIG, at some point in the near future I expect a much more violent rebound towards zero as the realization that paying a floating rate and receiving 2.5% over 30 years has a ton of risk and the flight to short-term Treasuries unwinds.