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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (65940)	8/8/1999 6:42:00 PM
From: Henry Volquardsen	Respond to of 132070

Hi Les, the article makes reference to one important point about swap spreads which is often overlooked. Dealers instead have attributed the current widening trend in swap spreads to a rush of corporate supplies to market by treasurers seeking to avoid Year 2000 computer problems at a time when the available supply of government securities is shrinking due to the federal budget surplus. With swap spreads at the highest level in a decade we have heard a lot of talk about swap spreads being reflective of credit concerns. But it should be remembered that swap spreads also reflect supply demand relationships between government and corporate debt. Swap spreads have been widening for better than two years. I positioned myself for widening swap spreads a couple of years ago. The rational for this position had nothing to do with credit concerns. What prompted it was my belief that the ongoing strength in the US economy would generate an ongoing budget surplus. Meanwhile demand for Treasuries would continue to grow at a normal pace with the result there would be a relative shortage of Treasuries (the key word there is relative). Meanwhile strong economic growth would prompt increased corporate credit demand an insure a healthy supply of corporate supply. It was pretty clear that this new shift in the supply dynamic would cause spreads to widen, I know a number of dealers who had this position. Credit concerns are behind spikes in the spread but the underlying supply demand situation, I believe, is behind the long term trend. I've seen several articles recently, not the one you posted, that argue that the fact that spreads are at the same level as last fall indicates there must be the same pressure in the system as last fall. I disagree. Price does not indicate stress, liquidity does. Last fall large segments of the capital markets had shut down. There was an extraordinarily low level of liquidity. Currently there is no real liquidity problem. This makes me believe that last weeks rumours were probably premature. A case of people using last year's news to explain this years prices. History repeats itself but usually not verbatim. Henry