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U.S. 10-Year Swap Spread Negative for Fourth Day as Corporate Sales Rise
U.S. 10-year interest-rate swap spreads were negative for a fourth day as corporate debt issuance surges and the rate banks charge each other for dollar loans declines.
The rate to exchange floating- for fixed-interest payments for 10 years fell below the comparable-maturity Treasury yield by as many as 4.38 basis points, the least since April 15. The spread widened 0.5 basis point to negative 2.25 basis points at 10:25 a.m. in New York. The spread turned negative for the first time in March.
U.S. corporate bond sales soared 31 percent to $85.7 billion this month, the busiest July on record, as yields fell to the lowest in more than six years on growing investor confidence in the economic recovery. The London interbank offered rate, or Libor, which banks say they can borrow at for three months in dollars, fell the most today in almost 11 months, dropping to the least since May 14.
“There has been corporate issuance, which is very often a part of the reason why swap spreads narrow, with firms that hedge out their issuance into swaps tending to be the financial corporations,” said Suvrat Prakash, a strategist in New York at BNP Paribas SA. “Swap spreads overall are on a one-way path downward, which will likely keep going as Libor rates should continue to fall.”
Libor dropped to 0.454 percent from 0.466 percent yesterday, according to the British Bankers’ Association. That’s the biggest decline since Sept. 1, 2009. The dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, narrowed to 26.4 basis points, down about 24 percent from its high this year of about 34 basis points on July 15.
‘Should Never Happen’
“Some people have likely been caught up by the dip in the 10-year Treasury yield below 3 percent,” said Michael Shaoul, chief executive officer of New York-based Oscar Gruss & Son Inc., in an interview. “In theory, a negative swap spread should never happen. However, we know from the 30-year spread staying negative that this doesn’t have to be catastrophic.”
The 30-year swap spread turned negative for the first time in October 2008 and had mostly traded below zero since January 2009. The spread widened 1.56 basis points to negative 30.25 basis points today.
Swap rates are typically higher than Treasury yields as the floating payments are based on interest rates, such as Libor, that contain credit risk. Sovereign debt is usually viewed as less risky.
-- With assistance from Sapna Maheshwari and Tim Catts in New York. Editors: Dave Liedtka, Greg Storey
To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net.
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