France Trésor moves out of swaps

The swap market reacted calmly to a decision by the French debt management agency, Agence France Trésor, to suspend its swaps programme last month. The Trésor says it has made this decision because of increased volatility in the bond markets in the past few months. Following the announcement, European swap spreads widened by around 2 basis points across the curve.

Sylvain de Forges, head of the Trésor, said the agency, which has done $20 billion of swaps this year, plans to resume its programme when it believes the market has stabilised.

Although the Trésor is the most active government agency in the European market, with a E30 billion annual swaps programme, its decision to halt its debt swap programme has been overshadowed by broader concerns regarding the equity markets and the economy in general. The European fixed-income market has seen increasing volatility over the past two months, mirroring the volatility in the equity markets.

Meyrick Chapman, interest rates analyst at UBS Warburg, says the swaps market as a whole had been “wildly volatile” in recent times. Swaption volatility, generally used as a proxy for swap volatility, reached a high point of 73.3% on August 17, compared with the average over the last two years of around 60%.By contrast to the wild swings in swap rates, swap spreads have remained generally stable over the past few months. “One of the most puzzling things is the stability of swap spreads over the past few months – it seems they are set in stone,” says Cesar Molinas, chief of European fixed-income strategy at Merrill Lynch.Ten-year swap spreads have generally traded between 20bp and 25bp over the underlying in the past year, though they did push out to around 32bp on August 14, when the swap rate hit its low for the year. “One possible explanation may be the lack of corporate bond supply this year,” says Molinas. “Corporate activity normally acts as an amplifier of swap spreads.”
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