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.
Thursday, November 20, 2008
Update on 30-year Swaps
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6 comments:
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
andrew.knight@omg.com.au
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)
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?
Exactly.
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?
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.
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