Oct. 8 (Bloomberg) -- The spread between the rate on 10- year interest-rate swaps and Treasury yields collapsed to the least since before credit markets began to seize last year after coordinated central bank rate cuts.

The spread narrowed to as low as 44.94 basis points, the smallest since Feb. 6, 2007. The differences, or gaps, between swap rates of most maturities over corresponding Treasury yields are down today. The 10-year swap spread was 52.25 basis points at 3:06 p.m. A basis point is 0.01 percentage point.

``The movement in the 10-year swap spread is signaling a break in the upward trend in credit spreads,'' said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York. The movement ``is probably hinting at a drop in the two-year swap spread, which if it occurs would strongly signal an easing of pressures in the inter-bank market.''

Two-year swap spreads are often used as a gauge of credit concern and near-term expectations for the London interbank offered rate, or Libor. The two-year swap spread is down almost 1 basis points to 133 basis points. It reached 167.25 basis points on Oct. 2, the widest since Bloomberg began compiling the data in 1988.

Swap rates serve as benchmarks for investors in many types of debt often purchased with borrowed money, including mortgage- backed securities and auto-loan securities. Narrower swap spreads can push borrowing costs lower even if Treasury yields are steady.

Floating For Fixed

The Federal Reserve, European Central Bank and four other central banks lowered interest rates by half a percentage point in an unprecedented coordinated effort to ease the economic effects of the worst financial crisis since the Great Depression.

Swap spreads are the premium charged over Treasury yields to exchange floating for fixed-rate payments. Swap rates are higher than Treasury yields in part because the floating payments are based on interest rates that contain credit risk, such as the Libor.

The Libor rate that banks charge each other for three months, set before the coordinated rate cuts were announced today, was 4.52 percent, up 20 basis points from yesterday, the highest since January, the British Bankers' Association said.

The narrowing in swap spreads is also probably related to derivative hedging, according to Eric Liverance, head of derivatives strategy at UBS Securities LLC in Stamford, Connecticut.

``The abrupt movements today are likely due to hedging- related activity by exotics trading desks due to the flattening of the spread between the 30-year and 10-year swap rate,'' Liverance said. ``This is a phenomenon that has happened before and I would not read any credit related issues into it.''

The 10-year and 30-year swap rate are roughly equal at about 4.24 percent, the smallest difference since February 2006. The 10-year swap rates was 4.13 percent yesterday, or 21 basis points below the 30-year rate of 4.34 percent.

To contact the reporter on this story: Liz Capo McCormick in New York at Emccormick7@bloomberg.net

Last Updated: October 8, 2008 15:10 EDT