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Swap Spreads - there are undoubtedly better subject experts on here than me but someone needs to try and cut through some of these bad takes today so here goes.
*makes sign of the cross*
1/n
*makes sign of the cross*
1/n
"OMG SOMETHING I VAGUELY ASSOCIATE WITH A FUNDING CRISIS IS REVISITING THE CRISIS LEVELS"
What does that chart even mean? Its a spread between 10yr swaps and 10yr cash treasuries. Simply, spread = swap rate - cash bond rate
2/n
What does that chart even mean? Its a spread between 10yr swaps and 10yr cash treasuries. Simply, spread = swap rate - cash bond rate
2/n
The spread is showing the shifting supply/demand of each the cash treasuries and the swaps. A perfect equilibrium market would be 0.00. When spreads run, its because theres some imbalance in supply or demand for swaps or cash tsys. 3/n
So with spreads 
its is implied that either theres a lot of demand to pay swaps or a lot of demand to receive tsys (swap [UP] - TSY [DOWN]) = spread [UP] 4/n
its is implied that either theres a lot of demand to pay swaps or a lot of demand to receive tsys (swap [UP] - TSY [DOWN]) = spread [UP] 4/n
What makes swap rates move? A LOT OF THINGS - and it depends on the tenor. 5/n
What is making them move right now? Bank portfolios. Remember, QE produces increased deposits. Banks now flush with zero duration deposits are underweight duration and USTs are the easiest way to add duration. 6/n
https://twitter.com/MagnusMacro/status/1361454444278411272?s=20
https://twitter.com/MagnusMacro/status/1361454444278411272?s=20
So why are swap spreads ? Its technical but basically because large pools of capital are grabbing duration as it cheapens. And Yes, MBS convexity, RV funds, and systematic hedging, dealer inventory, and carry play a role too 7/n
? Its technical but basically because large pools of capital are grabbing duration as it cheapens. And Yes, MBS convexity, RV funds, and systematic hedging, dealer inventory, and carry play a role too 7/n
If you're an expert in this, please add freely but I think we can all agree this is not an Armageddon event and just because its opaque doesn't mean we should pretend it is. 8//n
As per tradition 9/end
