The unwinding of swaps and futures led to massive movements in the over-the-counter interest-rate derivatives market last week, as some hedge funds and proprietary desks sold in advance of the end of the month when many, particularly in the U.S., close their books for the year. The activity led to substantial moves in all swap spreads. For example, in the U.S., the more liquid two-year spreads widened to 3.8% from 3.52% last Tuesday, a huge move when compared to the daily average of roughly seven basis points, according to traders and strategists. A relatively benign week of U.S. economic figures also contributed, leading punters to speculate interest rates may start to raise early next year.
The majority of the activity, however, centered on the more-liquid listed markets. More than a million short-end futures were traded on the London International Financial Futures and Options Exchange on Tuesday, an astronomical amount, roughly double the average daily volume, said Meyrick Chapman, a derivatives strategist at UBS Warburg in London.