In 2001 the swap curve started to stake a serious claim to becoming the U.S. fixed-income benchmark of the future and the Federal Reserve ensured there was volatility with eleven interest-rate cuts. The interest-rate cuts helped to spur growth in the derivatives market throughout the year, as strategists and marketers pumped out products to aid investors looking to capitalize on the cuts.
The swap curve began being widely accepted as the benchmark for interest-rate derivatives in the U.S. in the middle of 2000. However, in 2001, the main theme was how that transition impacted the market. The impact of the move caused increased volatility and also increased the correlation between swap spreads and Treasury-rate spreads. The managers of funded mortgage portfolios, such as agencies and mortgage bankers, fueled the increase in correlation through higher demand to receive fixed in swaps. They did this in order to offset the duration shortening that had been taking place in the mortgage market because of the Fed's continued rate cuts, according to Brad Stone, head of fixed income marketing and derivatives strategy at Barclays Capital in New York.
"People are a lot more interested in the movement rate of the swap curve. And more people are talking about curve volatility," said Jon Kinol, managing director of North American over-the-counter derivatives at Deutsche Bank in New York.
In the summer Cantor Fitzgerald and Credit Suisse First Boston began hiring interest-rate derivatives traders to handle increased demand for transactions based on the swap curve. In August, CSFB officials said they planned to increase their interest-rate derivatives sales and trading staff by 30% throughout 2002 (DW, 8/13). Cantor, however, has put its U.S. plans on hold since Sept. 11, according to a spokesman.
Separately, Deutsche Bank created a first of its kind cross-rates desk in New York in late August. Customers can call the cross-rates desk and trade packages of risks made up of swaps, mortgages, agencies and government bonds. This initiative soon caught the eye of traders at J.P. Morgan and Goldman Sachs, who began examining the possibility of creating similar trading desks. "It sounds like a great idea. With the amount of different clients, especially corporates, entering the market. This seems like a logical way to go. It just makes things easier," said an interest-rate trader at Goldman Sachs.
