Swaps houses including Bank of America, JPMorgan and Standard Chartered have set their sights on pioneering a 15-year local currency interest rate swap market after the first 12-year deal was executed last week. Aaron Poon, Hong Kong head of rates trading at JPMorgan, said the move to extend the interest rate swap curve was triggered by demand for higher yielding products and made possible by a jump in the volume of long-term local debt. Bond shops have underwritten over HKD2.17 billion (USD278 million) in long-term debt so far this year compared with only a few hundred million dollars last year.
Bankers said the 15-year swap market will likely take until year end to develop, but once it does it will also give rise to relative value plays. Once the market develops, curve plays such as the 10-year versus the 12-year swap rate will appear, according to an official at Bank of America. "This will give clients more options," he added.
"We're quite keen on this market," said Dennis Wong, North East Asia regional head of interest rate derivatives at Standard Chartered in Hong Kong. "There's demand from investors and issuers to extend duration to obtain a higher yield," he added.
JPMorgan last week executed what is widely regarded as the first 12-year swap, when it pulled off a HKD50 million swap via Prebon Yamane. An official at Prebon said there had been over five transactions last week. "Hopefully, this will help further develop the local bond market," said Poon, explaining that a liquid swap curve will entice more issuance in the long end. Market participants said that Goldman Sachs also entered 12-year trades. Mei Zhang, spokeswoman at Goldman, did not return calls.