Rates Markets Update: Swaps ride out terrorist scare

Interest rate swap spreads continued in a narrow range this week, despite a slight widening caused by the fear that the crash of a small plane into a Milan office building on Thursday was the work of terrorists. Initial fears led to 10-year US dollar spreads widening by around 1-1.5 basis points to 63.5bp. However, spreads came back in, settling at around 62bp, once the fear passed.

Dealers in the US claimed poor liquidity in the swaps market had prevented spreads from widening further on Thursday’s news. Apart from a slight widening last week, swap spreads have been steadily narrowing since the start of the year, with volumes showing a consequent decrease. Five-year swap spreads have dropped from a high of 80bp at the start of the year to their present level of around 56bp.

The other main development in the markets this week was Alan Greenspan’s testimony to the US Congress