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Advaita
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What are the more important factors for a swap spread tightening/widening?

March 7th, 2007, 6:05 pm

What are the more important factors for a swap spread tightening/widening?thks
 
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StructCred
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What are the more important factors for a swap spread tightening/widening?

March 7th, 2007, 8:21 pm

As with most things the two most important factors are supply and demand. There are a number of market forces that would drive the swap spreads here are a few (in no particular order):Flight to quality - when something crashes, people suddenly remember there are risks and funds flow into treasures. Spreads widen.Corporate issuance - heavy issuance may drive spreads wider, since you can invest in corporate paper. Issuers hedging the pipeline can also move spreads.Mortgage hedging - if refi's increase, people will look to extend duration of their portfolios by receiving on the swap. Spreads tighten.Treasury issuance - supply of govvies can move the spread (whichever way the surprise is).Regulations - if insurers, pensions etc have to hedge the liabilities and bond issuance in the long end is sluggish, swaps may look awfully good.
 
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Advaita
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What are the more important factors for a swap spread tightening/widening?

March 8th, 2007, 5:27 pm

Thanks SC, have a few qns to follow up --Flight to quality..--> Slightly Agree. But does the swap rate necessarily move the other way in this scenario? Is it's move predictible? The last week for instance, the swap rates moved down by 10bps. (The net was still a spread increase)Corporate issuance..--> Agree. Could you explain "hedging the pipeline". Does this mean doing a recvr to effectively pay LIBOR + x? So then spreads tighten due to hedging demand on the swap rate?Mortgage hedging..--> Slightly Disagree with reason. Why would they not just be buying recvr swaptions instead? This would cover the neg convexity as well as provide +ve duration. This would increase the vols AND cause swap rates to fall, and thus spreads tighten.
Last edited by Advaita on March 7th, 2007, 11:00 pm, edited 1 time in total.
 
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StructCred
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What are the more important factors for a swap spread tightening/widening?

March 8th, 2007, 7:38 pm

On FTQ - when a real shock to the system happens, treasuries would usually outperform swaps. Logical or not, in these periods people snap up the govvies. Swap rate may decrease, but spread usually increases.By hedging the pipeline, I mean corporates paying fixed on a swap in order to lock in rates in anticipation of issuing bonds. For mortgage hedging - receiver swaptions ARE a better hedge. The problem is there are nowhere near enough sellers of vol out there to hedge all the mortgages. When every US homeowner is long a prepayment option, mtg servicers and GSEs are always short vol. They may hedge part of their portfolios with swaptions, but they are always underhedged.
 
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pcg
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What are the more important factors for a swap spread tightening/widening?

April 9th, 2007, 1:55 pm

I have a question here . Why do in some markets swap rates stay below Guvvy rates for long ? Is supply demand the answer ? Or is there something more to it ?Apparently this happens only in emerging markets .Any clues most welcome .