Rate-linked notes trigger ‘pain trade’ for dealers

Negative 2y30y US swap spread sees hedging costs for range accruals soar, fuelling more flattening

Rate-linked-notes-cause-pain-trade

The inversion of the US dollar swap curve between the two-year and 30-year points in recent weeks has led to losses for some banks’ exotics desks, as dealers struggled to re-hedge their exposure to structured products known as range accrual notes.

The 2y30y constant maturity swap (CMS) spread was around 190 basis points a year ago, but a steady flattening this year saw it turn negative at the end of March, bottoming out at -39.4bp on April 5. A second inversion took place on April 19, and it

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