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Swap-Spread Surge May Reverse, RSI Shows: Technical Analysis

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Nov. 16 (Bloomberg) -- U.S. interest-rate swap spreads surged to levels that suggest the move may be about to reverse, based on the relative strength index, a technical indicator.

The two-year spread widened to 49 basis points yesterday, a 17-month high. Investors use swaps to exchange fixed and floating interest rates. The difference, or the gap between the fixed component and the yield on similar-maturity Treasuries, has increased as Europe’s sovereign debt crisis spurred demand for the relative safety of government debt.

The 14-day relative strength index for the spread was at 73 today, according to Bloomberg data, exceeding the 70 level some traders see as a signal an asset’s price change is overdone. A tumble in European bonds is driving the trade and will still influence where it goes next, said Peter Jolly, head of market research at National Australia Bank ltd.

“Spreads are blowing out,” said Jolly, who is based in Sydney for the bank, Australia’s largest lender as measured by assets. “We’re away from normal levels. At some point, it’s going to be better value. If Europe goes into meltdown, we’re going to breach the highs.”

New governments in Greece and Italy are attempting to tackle the region’s bond crisis, after investors sent yields in those nations surging on concern the governments will have trouble paying their debts.

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index. The relative strength index measures momentum, and readings of 70 or more signal an overbought condition, while 30 or less indicate an oversold state.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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