November 3, 2015 / 8:52 PM / 2 years ago

U.S. SWAPS-U.S. swap spreads hit record negative levels

NEW YORK, Nov 3 (Reuters) - U.S. five-year and 10-year interest rate swap spreads turned to their most negative levels on record on Tuesday as an expected tide of corporate bond supply pushed down the cost to hedge fixed-rate cash flows versus floating-rate cash flows.

The costs for investors to exchange floating-rate cash flows for fixed-rate cash flows in the dollar interest rate swaps market has fallen as companies are on track to sell more than $1 trillion in this year.

The widening in swap spreads has intensified in recent days with the rise in Treasuries yields on expectations the Federal Reserve may raise rates in December and dealers holding more Treasury bills in the coming weeks in the wake of the debt ceiling extension into March 2017, analysts said.

Already $7 billion in investment-grade corporate debt have been sold so far this week, according to IFR, a unit of Thomson Reuters.

“There’s still a lot of expected issuance on the way,” said Jonathan Rick, interest rate strategist at Credit Agricole Corporate & Investment Bank in New York.

With some of these deals, some players enter into swap contracts to receive fixed-rate cash flows, driving down the interest rates on swap contracts.

Due to the heavy corporate supply, this demand for this type of hedging has caused medium- to longer-dated swap rates below comparable Treasuries yields, resulting into them to go negative.

On Tuesday, five-year dollar swap spread was quoted at -5.00 basis points, down 2.25 basis points from late on Monday, according to Tradeweb.

The 10-year swap spread deepened to -9.50 basis points from -8.25 basis points on Monday. (Reporting by Richard Leong; Editing by Andrew Hay)

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