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.

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5 comments:

  1. AnonymousDecember 18, 2008 at 6:53 AM

    I THINK THIS IDEA IS SO GOOD SO FAR BECASUE FALL OF WALL STREET.
    BUT YOU HAVE TO EXPLAIN MORE ABUT THE METHOD OF THIS.AND I AM WAITNG FOR YOUR RESPONSE.
    THANKS
    ----------------------------------
    RASHID MAHMOOD AZEEMI
    Make Money

    ReplyDelete
  2. JakeDecember 18, 2008 at 10:45 AM

    Not sure which part to explain... please explain.

    ReplyDelete
  3. donnyDecember 18, 2008 at 6:04 PM

    I think there's probably lots of money still to be made in treasuries--but it's like playing russian roulette with the fed, and they get to choose when the bullet's in the chamber. I don't like this game; we shouldn't be looking for bigger fools, we should be looking for someone we can be of some service to, that's were real prosperity comes from.

    ReplyDelete
  4. AnonymousDecember 19, 2008 at 2:41 AM

    Hi,
    Sorry, but I don´t get what this means. Can you please try to explain it in a few simple words?

    thanks Michael

    ReplyDelete
  5. JakeDecember 19, 2008 at 7:32 AM

    Hi Michael-

    LIBOR is the rate at which banks lend to one another. The swaps curve is like the Treasury yield curve, but rather than "predicting" the future short-term Treasury rate, the Swaps curve "predicts" the future LIBOR rate.

    Like Treasuries, one can lock in those future swap rates (i.e. just just someone can buy a 30 Year Treasury at a specific rate now, a Swap counterparty can lock in the 30 Year Swap Rate). More specifically, in the swaps market, someone can receive a fixed payment each period (the swap rate) and pay whatever LIBOR rate is currently priced in the market at each period for the life of the swap.

    Currently for 30 years, this rate is 2.5%, which is actually lower than Treasury rates (the difference between the Swap rate and Treasury rate is the spread - currently negative), implying that a bank can borrow more cheaply than the U.S. government.

    My thinking it this is WAY too low.

    Help?

    ReplyDelete