Rates Markets Update: Swaps see low flows with trading in narrow range

US dollar swaps continued to trade near record-low levels. Ten-year swaps ended the week at 54.5 basis points, largely unchanged from the previous Friday. Five-year spreads narrowed 8bp to 45bp. This contraction was nearly all caused by the five-year $90 billion government bond issue midweek.

The equity market rally, following Cisco Systems' strong results on Wednesday, led to an initial tightening of swap spreads. But most of the gains in equities were reversed on Thursday, bringing swap spreads back in line with previous levels. Dealers are awaiting US retail sales data, due Monday, which if lower than expected would cause spreads to widen, said one dealer at a US bank.

Euro swaps trading was turbulent throughout the week, with poor economic data in the US leading to an initial widening of spreads on Mondy. But, by Thursday, swap rates had fallen back to earlier levels. Dealers were pre-positioning themselves ahead of heavy bond issuance due next week.

“We expect the market to rally next week,” said Christophe Coutte, director of euro swaps at Deutsche Bank. “Funding is currently attractive, with rates relatively cheap.”

Ten-year swap spreads ended the week slightly up at 22.5bp.