US SWAPS-Ugly response to ongoing yield upsurge
biz.yahoo.com
(Updates prices, comments; changes dateline; previous NEW
YORK)
CHICAGO, July 29 (Reuters) - Spreads on U.S. interest-rate
swaps on Tuesday suffered their biggest one-day blowout since
the Sept. 11 attacks in 2001 as mortgage players raced to
rebalance portfolio duration in the face of a seemingly
inexorable rise in yields.
With Treasuries in a tailspin, benchmark 10-year yields and
swap rates soared once again to their highest levels in a year,
driving intermediate swap spreads wider by nearly 5 basis
points -- an unusually large move for the market.
Much of the blame fell on the massive mortgage market and
the needs of a variety of participants to pay fixed rates as
they hedge convexity risk. Those include bank portfolios,
insurance companies and both Fannie Mae and Freddie Mac,
traders said.
"The mortgage guys are pounding the market as the yield
curve steepens faster than they could have imagined," said a
swaps dealer at a major German bank. "It's a one-dimensional
theme right now -- paying, paying and more paying."
Wednesday's looming Treasury refunding and potentially
record-sized government debt auctions while the market is
plunging also prompted dealers to unload bonds and added more
pain to an already bad situation.
"It's a pretty bad recipe," said a trader at one European
investment bank.
Mortgage-related positioning is a juggernaut for swaps and
Treasuries alike. At about $4.9 trillion, pumped up by the
housing market's rise in recent years, the mortgage securities
market is bigger than the government bond market.
"Extension risk remains one of the major concerns for
mortgage investors," strategists at Credit Suisse First Boston
said in a research note.
A weak consumer confidence report on Tuesday provided
momentary relief to the upward push in yields and related
widening of swap spreads. But that brief recovery merely
provided a good opportunity for players to keep up the
selling.
The Conference Board's July gauge tumbled to 76.6, far
below the median estimate of 85.0 and June's 83.5 reading.
Worries about the job market appear to be weighing on
consumers' attitudes.
Meanwhile, expectations for the Federal Reserve to keep its
fed funds rate steady at 1.0 percent at its Aug. 12 meeting has
wrenched the swaps curve to all-time highs. Short-term rates
have held some ground even as longer maturities are hit by
repeated waves of selling.
While mortgage portfolio trouble has driven the paying of
fixed rates in swaps, widening agency spreads have also hurt
swap spreads as Asian investors have joined Europeans in
selling those bonds. The agency and swaps markets tend to be
closely linked, with one influencing the other.
But despite rumors of the European Central Bank
recommending its member banks sell agencies, an ECB official
told Reuters Tuesday it was unlikely the central bank would
have done so.
Both five- and 10-year swap spreads, the focus of much
mortgage hedging, expanded almost 5 basis points Tuesday -- one
of the worst one-day moves since markets reopened after the
Sept. 11 attacks, according to Reuters data. They are now
nearly 9 basis points wider in just two sessions.
Ten-year spreads stand at 49-3/4 basis points versus 45-1/2
on Monday, while five-year spreads pushed out to 49 compared
with 44-1/2 a day earlier. Both stand at their highest levels
since last November.
Sallie Mae's parent company reportedly postponed a $500
million five-year global bond deal until Wednesday. The
fixed-price bonds are likely to be swapped to floating. |
