Trésor unlikely to resume swaps programme in near future

The Trésor suspended its €60 billion swaps programme last September, citing increased market volatility, but said it would re-enter the market once conditions had improved. However, despite the resolution of the Iraq war - the major source of market uncertainty this year - volatility has remained at high levels.

Any resumption of the French swap programme will “be a clear vote of confidence” for the euro market in general, said de Forges.

Despite the reluctance of the French agency to enter the swaps market, dealers have reported increased flows this year coming from hedge funds and real-money accounts, as well as increased activity in the structured business.

Although bank business has increased, the listed swaps market has seen low volumes. Euronext.Liffe’s 10-year swapnote had an average daily turnover of 2,450 contracts this May, while the two-year contract had an average daily turnover of 692 contracts for the same month. This compares with daily average volume figures of 4,858 and 2,137 for the six months to the end of June.

“The listed contract is not a particularly good way of getting into the interest rate markets,” said a London-based analyst at a large global house, who spoke on condition of anonymity.

Despite France’s reluctance to re-enter the swaps market, the German debt management agency, Deutsche Finanzagentur, has continued with its swaps activities and intends to transact €40 billion in notional this year, said Gerhard Schleif, managing director of the agency. This is an increase from earlier proposals to undertake €30 billion swaps notional this year.

But, as de Forges pointed out, the German agency's use of swaps is to find cheaper funding in the market, which differs from the French, which have focused on using swaps for duration management.

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