The rate on U.K. 10-year interest-rate swaps reached the lowest level relative to government bond yields in almost two years, taking its cue from its U.S. equivalent, which touched a record low.

The so-called swap spread fell to minus 2.40 basis points on Friday, the least since January 2014 on a closing-price basis. That’s down from this year’s high of 19.61 basis points set in August, according to data compiled by Bloomberg. 

A negative rate, where the swap rate is below the equivalent bond yield, is rare in sovereign markets, having never occurred in the U.K. before 2009. Swap spreads, a proxy of credit spreads, usually involve a premium over government securities. That premium is paid by investors seeking to exchange a fixed-interest rate for a floating one. Because of credit and counterparty risk, the spread tends to be positive.

Speculation that the Federal Reserve will raise U.S. interest rates this year, unwinding of government-bond holdings among some central banks and sovereign-wealth funds as well as an increase in corporate issuance, particularly in the U.S. are driving the spread lower in most major markets, according to UBS Group AG. The U.S. 10-year swap spread dropped to as low as minus 17.6 basis points on Thursday, the lowest since Bloomberg began collecting this data in 1988.

‘Global Phenomenon’

“It’s a global phenomenon, led by the U.S., and we are now seeing a similar trend in the U.K.,” said Joakim Tiberg, a fixed-income strategist at UBS in London.

Average gilt yields have climbed about 50 basis points, or 0.5 percentage point, since the end of January, according to Bank of America Merrill Lynch Bond Indexes. Even a decline in corporate-bond issuance in the U.K. this year wasn’t enough to stop to swap spread from narrowing. Debt issuance by companies and financial institutions was 64 billion pounds ($97 billion) this year, a 20 percent decline from a year ago, data compiled by Bloomberg showed.

Adding to the pressure is balance-sheet constraints among dealers, according to HSBC Holdings Plc’s head of fixed-income research Steve Major. Regulations designed to curtail the amount of risk banks can take following the financial crisis are limiting dealers’ ability to make markets, or simultaneous quotes for bid and offer prices for bonds.

“Global banks cannot take the inventory the way they used to for various reasons, and that might be part of reasons why swap spreads are falling,” said Major. “The structural shift means the ability to warehouse risk and take on a kind of trades they did in the past is now limited.”

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