Monday, December 22, 2008

30 Year Swaps Flat to Treasuries

We've detailed the odd occurrence a few times at EconomPic of the 30 Year Swap trading through Treasuries (implies that banks can borrow at a lower rate than the U.S. government). This has whipped back over the past few weeks and today has traded a 0 bps to Treasuries.

I won't declare victory in credit markets just yet, but it is a good sign.


  1. Not sure why this is considered good or bad. Seems indifferent to me as banks are basically an extension of the Fed balance sheet and federal government for all intents and purposes now. This doesn't have any impact on credit to the real economy. Just filling in holes of the banks balance sheets.

  2. On its own as a rate, I agree it is neither good or bad. However, certain things are occuring in markets due to technical rather than fundamental factors (i.e. 30 year swaps trading through Treasuries). I am hopeful that this spread (and other technical factors) reverting back towards a "normal environment", I view the credit markets becoming "more normal", which is a good thing.

    In addition, it has been a pretty sweet trade. Buy Treasuries and hedge out the interest rate risk with swaps. This has reverted 60 bps in a matter of weeks. 60 bps * ~ 20 years of duration for a 30 year bond = 12% return in a few weeks with negative credit spread beta.