USD swap spreads under a new Credit Regime

Samsaveel · August 6th, 2011, 11:59 am

Willmoters/Economists,how does the S&P downgrade of the US Credit rating affect the USD swap spreads ?

Martinghoul · August 8th, 2011, 12:33 pm

Good question... Pls let me know once you find out.

secondmoment · August 8th, 2011, 7:41 pm

USD swap spreads will likely widen (as they have been for the last few days) partly due to the flight to quality into Treasuries as well as some fears regarding bank capital cushions (esp BAC) and general risk off sentiment. If US Treasuries downgraded, banks are obv. not immune to the effects since they have implicit support from the govt and hold large amounts of Treasuries or other instruments closely linked to Treasuries.

prodiptag · August 9th, 2011, 3:55 pm

so everything they taught us in college about finance was basically wrong , if an entity is downgraded, its issuance is supposed to sell-off!! and alas the opposite happens in reality

Traden4Alpha · August 9th, 2011, 4:29 pm

QuoteOriginally posted by: prodiptagso everything they taught us in college about finance was basically wrong , if an entity is downgraded, its issuance is supposed to sell-off!! and alas the opposite happens in reality Unless Treasuries are a Giffen good.One might argue that a downgrade of UST is a downgrade of the global economy due to the role of UST and USD in financial systems and global commerce. UST might still remain the least risky asset even if they are deemed more risky than they were before.