Friday, October 24, 2008

Swap spreads turn negative

From the Financial Times:
The turmoil in the financial markets has taken hold of the strategically important trade in long-term interest rate derivatives, pushing rates to levels once thought to be a “mathematical impossibility”....

...On Thursday, the 30-year swap spread turned negative after briefly flirting with such levels earlier this month. This implies investors are somehow reckoning that they are more likely to be paid back by a private counterparty than by the government.

“Negative swap spreads have been considered by many to be a mathematical impossibility, just like negative probabilities or negative interest rates,” said Fidelio Tata, head of interest rate derivatives strategy at RBS Greenwich Capital Markets.

Traders and analysts believe this reflects aftershocks from the demise of Lehman Brothers and capital constraints at surviving banks rather than a loss of confidence in the US government....MORE

Well that's comforting. HT: naked capitalism, he's got a great link list today.