The steep US Treasury curve means an issuer can currently exploit the differential between short- and long-term rates by swapping its fixed-rate liabilities into short-term floating-rate cash flows. A poll conducted by UK information provider Reuters last Friday found that 20 out of the 24 primary dealers of US government securities surveyed, expected the Federal Reserve to edge the Fed funds rate to 2% or higher by the close of 2002, up from a current 1.75%.
Issuers are likely to continue swapping until the Fed reverses its current easing policy, at which point there will be increased pressure on spreads to widen. However, swap spreads should “narrow substantially” over the next few months, according to JP Morgan Chase's economics research, with five-year and 10-year spreads narrowing to around 50 basis points and 60bp, respectively.
The week on Risk.net, July 7-13, 2018Receive this by email