By Richard Leong
NEW YORK, March 23 (Reuters) - A market measure on U.S. corporate borrowing costs fell below benchmark Treasury yields on Tuesday for the first time in 14 months, signaling investor willingness to lend and to take risks.
Hedging on new corporate bonds and heavy demand in long-dated debt have also driven down the yield spread between 10-year Treasuries and U.S. interest rate swap contracts.
An increase in risk appetite coincides with a pickup in supply of corporate debt this week and has fueled a rally on Wall Street. For more, see
The improved sentiment has been stoked by low inflation and the U.S. Federal Reserve's pledge to hold short-term interest rates near zero to support the economic recovery.
'That's an unrelenting belief right now that we're not in danger of having the long-term rates rise or we're not having any further danger of the Fed tightening,' said Howard Simons, a strategist with Bianco Research in Chicago.
A sign of this growing confidence has been companies' and investors' willingness to lock in the interest rate they pay on floating-rate obligation, Simons said.
In the U.S. interest rate derivatives market, the cost to swap fixed-rate payments with floating-rate ones was below what the rate the federal government pays on its 10-year debt.
The spread on the 10-year swap over Treasuries closed at minus 2.25 basis points after narrowing to minus 2.50 basis point, a record intraday discount.
The 10-year swap spread was 0.03 percentage point above 10-year Treasuries late Monday
Other U.S. swap spreads tightened sharply with 10-years.
The two-year swap spread ended at 17.00 basis points from 19.25 basis points late Monday, while the 30-year spread was last quoted minus 20.25 basis points compared with minus 15.75 basis points late Monday.
SOVEREIGN RISK
Interest rate swaps have historically held yield premiums over Treasuries, expressing the default risk faced by a company or investor who enter into a swap with a top-rated U.S. bank.
A high-credit bank often carries a AA-rating by the major rating agencies, suggesting it has a higher chance of default than the United States that has a top-notch AAA-rating.
Tuesday's disappearance of a risk premium on 10-year swaps over Treasuries spurred chatter that traders are pricing in the growing default risk U.S. government growing default risk due to its massive deficit.
A majority of analysts, however, do not share this dire view of U.S. sovereign credit.
Most analysts attributed the spread tightening to heavy demand for long-dated, fixed-rate dollars due to low inflation and the Federal Reserve's pledge to keep interest rates near zero to support the economic recovery.
'I absolutely don't think U.S. (government) credit is worse than corporate credit,' said James Caron, head of global rates research at Morgan Stanley in New York.
There was also an allocation of money into long-dated swaps and other spread products from mortgage-backed securities, as MBS have not fallen much ahead of the Fed's $1.25 trillion MBS purchase program at quarter-end, one analyst said.
'This has everything to do with hedging new issue corporates and money earmarked for MBS trying to find a home in absence of MBS cheapening at the end of the buybacks,' said Christian Cooper, an interest rate strategist with RBC Capital Markets in New York.
(Additional reporting by Burton Frierson; Editing by Diane Craft)Keywords: MARKETS SWAPS (richard.leong@thomsonreuters.com ; +1 646 223 6313; Reuters Messaging: richard.leong.reuters.com@reuters.net ) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
NEW YORK, March 23 (Reuters) - A market measure on U.S. corporate borrowing costs fell below benchmark Treasury yields on Tuesday for the first time in 14 months, signaling investor willingness to lend and to take risks.
Hedging on new corporate bonds and heavy demand in long-dated debt have also driven down the yield spread between 10-year Treasuries and U.S. interest rate swap contracts.
An increase in risk appetite coincides with a pickup in supply of corporate debt this week and has fueled a rally on Wall Street. For more, see
The improved sentiment has been stoked by low inflation and the U.S. Federal Reserve's pledge to hold short-term interest rates near zero to support the economic recovery.
'That's an unrelenting belief right now that we're not in danger of having the long-term rates rise or we're not having any further danger of the Fed tightening,' said Howard Simons, a strategist with Bianco Research in Chicago.
A sign of this growing confidence has been companies' and investors' willingness to lock in the interest rate they pay on floating-rate obligation, Simons said.
In the U.S. interest rate derivatives market, the cost to swap fixed-rate payments with floating-rate ones was below what the rate the federal government pays on its 10-year debt.
The spread on the 10-year swap over Treasuries closed at minus 2.25 basis points after narrowing to minus 2.50 basis point, a record intraday discount.
The 10-year swap spread was 0.03 percentage point above 10-year Treasuries late Monday
Other U.S. swap spreads tightened sharply with 10-years.
The two-year swap spread ended at 17.00 basis points from 19.25 basis points late Monday, while the 30-year spread was last quoted minus 20.25 basis points compared with minus 15.75 basis points late Monday.
SOVEREIGN RISK
Interest rate swaps have historically held yield premiums over Treasuries, expressing the default risk faced by a company or investor who enter into a swap with a top-rated U.S. bank.
A high-credit bank often carries a AA-rating by the major rating agencies, suggesting it has a higher chance of default than the United States that has a top-notch AAA-rating.
Tuesday's disappearance of a risk premium on 10-year swaps over Treasuries spurred chatter that traders are pricing in the growing default risk U.S. government growing default risk due to its massive deficit.
A majority of analysts, however, do not share this dire view of U.S. sovereign credit.
Most analysts attributed the spread tightening to heavy demand for long-dated, fixed-rate dollars due to low inflation and the Federal Reserve's pledge to keep interest rates near zero to support the economic recovery.
'I absolutely don't think U.S. (government) credit is worse than corporate credit,' said James Caron, head of global rates research at Morgan Stanley in New York.
There was also an allocation of money into long-dated swaps and other spread products from mortgage-backed securities, as MBS have not fallen much ahead of the Fed's $1.25 trillion MBS purchase program at quarter-end, one analyst said.
'This has everything to do with hedging new issue corporates and money earmarked for MBS trying to find a home in absence of MBS cheapening at the end of the buybacks,' said Christian Cooper, an interest rate strategist with RBC Capital Markets in New York.
(Additional reporting by Burton Frierson; Editing by Diane Craft)Keywords: MARKETS SWAPS (richard.leong@thomsonreuters.com ; +1 646 223 6313; Reuters Messaging: richard.leong.reuters.com@reuters.net ) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.