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Lapsilago
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Posts: 259
Joined: October 15th, 2004, 7:36 am
Location: Germany

Negative Money Market Basis

January 3rd, 2015, 5:59 pm

Dear all,since august 2007 the money market basis is signigicant and it was occasionally negative. I denote nYxsys the xM against yM basis swap spread for a nY swap, eg. 1Y1s3s.I know that the nY money market basis could be negative after the fixing has happened and then the yield curve changes shape such that in a 1Y basis swap one needs to make the basis swap fair. This is a somewhat technical reason.Another reason might be for a long dated contract that forward implied nY money market basis is negative.Are there any other reasons (economic/liquidity) for the basis to stay negative for some time period? Even on a fixing? I might also think of negative forward rates...Any comments are welcome.Best, Lapsi
 
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Martinghoul
Posts: 3255
Joined: July 18th, 2006, 5:49 am

Negative Money Market Basis

January 9th, 2015, 3:34 pm

The basis fwds have occasionally gone negative in various ccies, for various flow-related reasons. In some special cases, spot can go negative, but I don't really see that happening in any mainstream mkt since 2007. What cases are you specifically referring to?
 
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Lapsilago
Topic Author
Posts: 259
Joined: October 15th, 2004, 7:36 am
Location: Germany

Negative Money Market Basis

January 11th, 2015, 4:42 pm

Thanks for your reply. I just wanted to grasp the rationale behind some options on the spread I have seen in the market.These options obviously only pay out if the basis gets negative. Thus, I wonder if there are any issues that can aries to send the basis to negative values for some time...
 
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Martinghoul
Posts: 3255
Joined: July 18th, 2006, 5:49 am

Negative Money Market Basis

January 12th, 2015, 8:28 am

Well, as soon as we start talking abt options, we're in the realms of basis fwds. Forwards can go negative for all sorts of reasons not related to anything fundamental.
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