Comments on: What to do with a Negative Swap Spread http://alephblog.com/2009/06/06/what-to-do-with-negative-swap-spreads/ Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control Fri, 25 May 2012 21:31:47 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Jasonhttp://alephblog.com/2009/06/06/what-to-do-with-negative-swap-spreads/comment-page-1/#comment-21930 Jason Mon, 08 Jun 2009 05:30:22 +0000 http://alephblog.com/?p=1792#comment-21930 Couple of other possible ways to play it, with the caveat that it was much more attractive back when the swap spread was in the -30's/-40's: 1) The straight up arb, buy the 30 year, repo it, then enter the swap. 2) Run some sort of leveraged floor CMS structure, where you receive some fixed amount and pay a coupon = leverage factor *(fixed amount - 30 year CMS). The idea being that once swaps go back to normal, you're on easy street. The 30 year CMS is also more liquid, and by making the structure callable, you can shorten the trade. Couple of other possible ways to play it, with the caveat that it was much more attractive back when the swap spread was in the -30′s/-40′s:

1) The straight up arb, buy the 30 year, repo it, then enter the swap.

2) Run some sort of leveraged floor CMS structure, where you receive some fixed amount and pay a coupon = leverage factor *(fixed amount – 30 year CMS). The idea being that once swaps go back to normal, you’re on easy street. The 30 year CMS is also more liquid, and by making the structure callable, you can shorten the trade.

]]> By: Hinjewhttp://alephblog.com/2009/06/06/what-to-do-with-negative-swap-spreads/comment-page-1/#comment-21927 Hinjew Sun, 07 Jun 2009 15:13:26 +0000 http://alephblog.com/?p=1792#comment-21927 I think to get an idea of what is going on here we need to look at what the largest institutional investors are doing. Consider a large pension fund or insurance company which needs to align cash outflows and inflows over a very long time period. In the recent crisis, many of the assets which they hold for the long run have suffered in value tremendously, leaving them underfunded at the long end of the curve. They could buy longer maturity bonds, but being relatively strapped for cash makes buying the cash bond less attractive. Swaps, on the other hand, do not require upfront cash payments making them very attractive as a duration grab. I think this explains a large part the swap curve trading tight of Treasury's. Any thoughts? I think to get an idea of what is going on here we need to look at what the largest institutional investors are doing. Consider a large pension fund or insurance company which needs to align cash outflows and inflows over a very long time period. In the recent crisis, many of the assets which they hold for the long run have suffered in value tremendously, leaving them underfunded at the long end of the curve. They could buy longer maturity bonds, but being relatively strapped for cash makes buying the cash bond less attractive. Swaps, on the other hand, do not require upfront cash payments making them very attractive as a duration grab. I think this explains a large part the swap curve trading tight of Treasury’s. Any thoughts?

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