Rate-linked notes trigger ‘pain trade’ for dealers

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

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