US SWAPS-Some spreads widen, fear mortgage mayhem
Tuesday July 8, 6:19 pm ET (do you see significance here George? Also they say rates stand just 8basis points below its all-time steepest level, any idea when that might have been? gd)
NEW YORK, July 8 (Reuters) - Spreads on longer-dated U.S.
interest-rate swaps popped wider on Tuesday as some market
players braced for a further rise in rates that could cause
mortgage portfolios to unload big hedges in swaps.
Traders were puzzled by the widening in spreads even as
rates were fairly stable on the session after the three week
sell-off in rates that had so far not damaged spreads too
brutally.
Goldman Sachs (NYSE:GS - News) sold $2 billion of 10-year notes, but
traders said the investment bank likely had already swapped its
deal before the offering was finished. One trader said Goldman
was seen paying fixed rates, helping to drive spreads out.
Ten-year spreads expanded to 36-1/4 basis points from 35 a
session earlier, while the usually illiquid 30-year spread
swelled more than 2 basis points to 30 from 27-1/2. Five-year
spreads edged out just a 1/4 basis point to 34-1/4.
Some of the widening of long-term spreads may have been due
to a mild flattening of the yield curve that traders viewed as
profit-taking from the relentless steepening that has taken
place in the past three weeks. The swaps curve stands just 8
basis points below its all-time steepest level.
Even as 10-year rates stabilized at 4.06 percent, traders
fear that hedge funds and other market players will try and
drive rates even higher and force mortgage portfolios to begin
dumping Treasuries and swaps to shed extra duration.
That would force a vicious circle as higher rates beget
more unloading of Treasuries and swaps, which drives rates yet
higher and forces yet more selling. The bond market's biggest
plunges in the past two years have come when the massive
mortgage market is forced to shift gears abruptly.
Some investment banks like Credit Suisse First Boston have
pegged the threshold for such selling near the 3.75 percent
level in the 10-year Treasury note, while other traders said it
was more likely to happen around 4 percent or 4.20 percent.
What could save the market from such a nightmare scenario
is Federal Reserve Chairman Alan Greenspan, if he reinforces
the central bank's commitment to keeping official rates low and
helps talk down long-term rates.
The sell-off in long-term rates gained steam two weeks ago
when the Fed disappointed markets with a milder, quarter-point
interest rate cut and expressed optimism on the economy's
prospects.
"Greenspan's going to have to talk long-term rates back
down," said one trader.
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