Banks have been encouraged to sell longer-term bonds since 10-year interest-rate swaps fell below U.S. Treasury yields for the first time, making it cheaper to convert fixed-rate liabilities to floating payments, according to the Bank for International Settlements.
The 10-year swap rate first fell below yields on similar- maturity U.S. government debt in March, the BIS said today in its latest quarterly review. The swap rate was at 2.71 percent, or 0.7 basis point less than Treasury yields, on Sept. 3, according to data compiled by Bloomberg.
Banks in particular took advantage of the favorable swap spread to issue debt and match their fixed-rate interest payments to floating-rate assets, according to the report. Financial companies have sold $185.7 billion of bonds with maturities of 10 years or more this year, almost a fifth of all the debt they’ve issued, Bloomberg data show.
“The negative 10-year swap spread may reflect hedging related to U.S. corporate bond issuance,” Basel, Switzerland- based economists Jacob Gyntelberg and Michael R. King wrote in the report. “Banks in particular may have been quick to take advantage of this opportunity.”
Citigroup Inc., the New York-based bank that’s 18 percent owned by the U.S. government, raised $2.25 billion in an offering of 10-year, 5.375 percent bonds on Aug. 2, the same day Swiss lender Credit Suisse AG sold $2 billion of 4.375 percent notes with the same maturity, Bloomberg data show.
Declining Yields
Yields on financial bonds fell to an average 3.73 percent on Aug. 24, the lowest since December 2004, from 4.7 percent at the end of last year, according to Bank of America Merrill Lynch’s Global Broad Market Financial Index.
Swap rates have traditionally been higher than Treasury yields in part because the floating payments are based on interest rates that contain credit risk, such as the London interbank offered rate, or Libor.
The price to exchange floating- for fixed-rate payments for 30 years fell below the equivalent Treasury yield for the first time in October 2008, according to Bloomberg data. The swap spread was minus 37 basis points at the end of last week. A basis point is 0.01 percentage point.
The BIS, formed in 1930, acts as a central bank for the world’s monetary authorities.
To contact the reporter on this story: Bryan Keogh in London at bkeogh4@bloomberg.net
Rate These Stories
Rate this Page