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French Treasury Details Swap Plans

The French treasury will likely execute a further EUR200 billion (USD178.3 billion notional) in interest-rate swaps over the next three to four years in order to reduce the average duration of its debt to four years.

Sylvain de Forges, chief executive at the Agency France Trésor in Paris, told DW, "we need Ministry approval, but it could be around four years." He continued that this goal would likely take four years to achieve. De Forges will make his proposal to the Ministry of the Economy, Finance and Industry in the summer.

In November the treasury executed EUR17.8 billion (notional) of interest-rate swaps to reduce its debt by 28 days and now has a swaps portfolio of EUR30.925 billion (notional). De Forges admits this is an exceptionally large notional value, but said it was necessary because the market in 10-year, 15-year and 30-year swaps has moved against the treasury so it has executed the swaps in shorter maturities, such as seven years. The market has moved against the treasury partly because of the amount of swaps the French treasury has entered and in preparation for similar programs from Germany and Spain.

A swaps trader in London said the asset-swap spread curve has steepened dramatically over the last six months, making it more expensive for the French treasury to execute trades. Last summer the asset-swap spread between 10-year government bonds and swaps was minus 35 basis points with the five-year rate at minus 20bps. But this rate had moved to minus 24.5bps in the 10 year and minus 20.5bps in the five year. Another trader predicted the 10-year rate could go to minus five if the treasury continues with its reduction program.

However, one trader said he is not preparing to position himmself for further steepening of the curve on the basis of the treasury's plans. It is dangerous to position your portfolio against one institution in case it changes its mind, he said. At this time of year profits from client trades have not built up so there is little appetite to take large proprietary positions.

The French treasury started its program in March and managed to reduce its debt by six months to six years in December. It aims to reduce it by a further six months by the end of 2002.


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