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U.S. 10-Year Swap Spreads Positive for First Time in Two Weeks

U.S. 10-year interest-rate swap spreads turned positive for the first time in two weeks amid speculation the government may begin reducing the amount of debt it sells as the economy strengthens.

The difference between the rate to exchange fixed- for floating-interest payments for 10 years and similar-maturity Treasury notes, known as the swap spread, touched 0.13 basis point from negative 1.25 basis points yesterday. The spread was last positive on April 6, when it touched 3.25 basis points. A basis point is 0.01 percentage point.

“There are expectations that there will be less Treasury issuance going forward, so if there’s less Treasury supply, swap spreads should move more positive,” said Thomas Tucci, head of U.S. government bond trading in New York at Royal Bank of Canada, one of the 18 primary dealers required to bid at Treasury auctions. “The Treasury will scale back, and that’s what people are finding more comfort in.”

The 10-year swap spread slipped to negative 1.56 basis points as of 1:15 p.m. in New York, down 0.31 basis point. The two-year swap spread rose 1.13 basis points to 16.19 basis points.

The 10-year swap spread turned negative for the first time on March 23 as the Treasury’s record-tying $118 billion in note auctions that week drew less demand than forecast. Corporate sales of investment-grade bonds almost doubled to $95.1 billion in the month through March 30, from $53.4 billion in February, increasing demand from companies to convert their fixed-interest payments to floating rates through the swap market.

Credit Risk

The Treasury 10-year note yielded 3.753 percent, and the 10-year swap rate was 3.751 percent. Swap rates are typically higher than Treasury yields as the floating payments are based on interest rates, such as the London interbank offered rate, or Libor, that contain credit risk.

Swap rates serve as benchmarks for many types of debt often purchased with borrowed money, including mortgage-backed securities and auto-loan securities.

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