US dollar swap spreads jolted around nervously this week in thin volume. At the close yesterday (Thursday) in New York, two year spreads were at 77bp, five years spreads were 72bp, 10 year spreads were 71bp and 30 year spreads were 63bp.
These prices were between 0.5bp and 1bp tighter than those seen earlier in the day.
Swap prices narrowed in the first half of the week due to stronger equity markets and a general attenuation of the credit and liquidity worries that have dominated the markets for the last month.
However, as equity futures dipped in overnight trading on Wednesday, prices began inching outwards, before sinking again yesterday.
Fed chairman Ben Bernanke’s imminent speech on housing and monetary policy loomed large over the market in dealing yesterday.
The market is scrutinising Bernanke’s every hand gesture and raising of the eyebrow these days for any clues about a possible rate cut at the next Fed meeting on September 18.
With the recovery of the market since the 50bp cut in the discount rate two weeks ago, an ease in the Fed Funds rate may not now be strictly necessary.
Nor does Bernanke want to confirm the impression that he will always bail out the market in times of trouble and that the "Bernanke put" is always worth buying.
Yet, on the other hand, the market may have got so used to the idea that the Fed will help, particularly in the wake of the discount rate easing, that a failure to deliver a Fed funds cut will elicit another wave of panic selling. It is not an easy call.
The disconnection between dollar swap spreads and Treasury yields remains conclusive. Ten year yields are about 4.50%, some 60bp inside levels seen at the beginning of June before the subprime crisis hit, yet in the same period swap spreads have jolted 12bp wider. Two weeks ago, 10 years were also trading at 83bp.
EIB gives cause for hope
The European Investment Bank sold a $3bn three year note which was confirmed to have been swapped to floating rate dollars, and the deal benefited from the recent widening of swap spreads.
It was able to offer official guidance of swaps less 20bp, which is several basis points better than the EIB has been able to attain for short end funding lately. However, due to the widening of the three year swap spread on Tuesday, the pick-up to Treasuries improved from 49bp to around 52bp.
The deal subsequently narrowed in secondary market trading to Treasuries plus 51bp, and the success of the deal encouraged some in the market to believe that this September might not be as bad as seemed likely a couple of weeks ago.
It is Labor Day in the US next Monday, and the August non-farm payroll is due at the end of the week, so it might be the week beginning September 10 before any meaningful assessments of the state of the market can be made. But, at the moment, an almost normal September with strong issuance from premier credits could be on the cards.
The Republic of Austria awarded the mandate for a $3bn 10 year deal in the week beginning September 17 to Goldman Sachs, HSBC, Lehman and Nomura. The offering is not likely to be swapped.
Swap-driven issuance, combined with a freedom from worrying headlines, should produce lower swap spreads in both dollars and euros in September. But any revival of credit/liquidity worries will lever spreads wider again.
In the euro market, asset swap spreads also edged wider at the end of the week. By the close yesterday, spreads to the cheapest to deliver 10 year Bund were 37.3bp, according to dealers in London.
This was about 0.5bp wider than prices seen at the close on Tuesday, but levels are still about 5bp inside the recent wide prints.
The 2s/10s swap rate curve closed the week at 10bp, while the 10s/30s is still in the 15bp-16bp range.
At the beginning of the week, Deutsche Bank offered a self-led Eu1.5bn 10 year note that priced at 103.3bp over Bunds. This is very likely to have been swapped to floating euros in house, and a level of around 63bp over Euribor seems within range.
Compagnie de Financement Foncier increased a 4.25% deal due May 2009 by Eu400m and is likely to have swapped the proceeds to floating euros.
The Republic of Portugal is lining up a five year benchmark for the week after next, and this is likely to be retained in fixed rate euros.
