Thursday, November 20, 2008

Update on 30-year Swaps

On October 21, I wrote that 30-year swap spreads, which were hovering around zero at the time, was a another sign that lack of liquidity was creating some non-sensical prices.

Now that same spread is -59. Yes, if you want to receive fixed and pay floating for the next 30-years, your fixed payment will be... drum roll... 2.85%.

Initially this was all about hedging of range notes. But there is more to it now. Many long-duration managers, particularly hedge funds and insurance companies, are holding highly illiquid corporate bonds, but they need to maintain that long duration. So say you own a 7-year Comcast bond, but you really want 30-year duration. Its easy enough. You pay fixed on a 7-year swap and receive fixed on a 30-year swap.

More likely a lot of managers are just receiving fixed on the 30-year as an overall portfolio extension trade. This doesn't require any cash commitment assuming the swap has a zero PV at origination. For a manager with a highly illiquid portfolio, that's probably real attractive right now.


Andrew said...

Hi Accrued Interest,

I'm emailing you in regards to a followup email I sent you a month ago in response to a partnership, have you had a chance to think about it?

If you have any questions or would more information, please advise me and we can go from there.

Kind Regards,
Andrew Knight

kristof said...

I guess people are really betting on the Japan scenario.

It's amazing to me how Japan has managed to get to their debt to almost 200% GDP and their interest rates are still around 0.

I just don't see the same feedback loop working in the US (unless consumers become savers and companies decide that 2% return is great news)

Sergei said...

How can receiving 2.85% for 30 years be attractive for someone who needs to invest long duration? Surely if 30-year swap rates go back up to 4.0%, anyone who enters a swap to receive 2.85% for 30 years would lose a bundle?

Accrued Interest said...


Lockstep said...

Why would the hedgies want the longer duration? Why would the insurance companies want the longer duration? I assume they both have independent reasons.

Is it because they want to appear better capitalized because they are receiving Treasury income instead of the corporate stuff?

Accrued Interest said...

A life insurance company wants longer duration because that's where their liabilities are. Same with a pension fund.

The other angle is mostly Asian buyers of non-inversion notes referencing 30-year swaps. They want to hedge these things, but the market is highly illiquid.