http://www.bloomberg.com/news/articles/2015-11-15/debt-market-distortions-go-global-as-nothing-makes-sense-anymore
Across the world, the "swap spreads" (the difference between an interest rate swap and the rate of a treasury with the same maturity) are going negative. It has happened in the US and the UK and in Australia the spreads have shrunk to the smallest on record.
It's believed that this is mainly due to investors pushing up yields on Treasuries, as the Federal Reserve continues to indicate that interest rates could rise in the very near future. The issue with the rates being inverted is that it would signal that the government rates are less credit worthy than than the other assets. US government bonds are typically looked at as the most risk-less asset.
Traditional pricing mechanisms in the bond market are not effective and this will be a time for speculators and arbitrageurs alike to take advantage of the mainsprings in the market. This distortion in the market makes many investors nervous. It will be interesting to see how the spreads move as the Fed continues forward with their plan to raise rates.
1 comment:
I have also noticed that swap spread rates have dwindled but the expectation of an interest rate increase can't be the only factor. The global market is very uncertain as oil prices have plummeted, terrorist attacks in peaceful countries are beginning to increase, and advanced economies such as China are in production slowdowns. These all could be contributing factors that can cause swap spreads to shift to negative.
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