those of you on this board know that I have been trading the futures/cash for a while (prop in Chicago) and am ready to go out on my own but don't have enough capital to trade the size I want. That being said I do have some capital to contribute and am looking for someone to back me/partner with me. If anyone is interested I can clear a reputable firm and get good rates (25-50 cents a turn) here in Chicago. If anyone is interested to partner with me I can show you my statements and am willing to put "X amount" in. Please private message me if you want to help me trade my own account and we can go over the specifics. thanks InvertedCurve
i am puzzled by one thing. maybe some guys here can help me out. swap spreads on 30 years are negative - what does it mean? A. too much cash in the system + too much credit risk in the system which does not allow to arb this away (ctpy risk on the swap)? B. treasury credit/default risk is viewed as larger than that of banks? C. arb opportunity? it is interesting to note that on 5 year the swap spread is relatively normal by historical standards while on 10 year it is very tight (while still positive).
Definitely not A... Certainly a bit of B. Surely not C, unless your fingers are of no use to you. Also quite a bit of "D. none of the above". My opinion...
i put C. more or less for fun. but both A. and B. were meant seriously. i also expected that somebody would add D., E. etc... I was thinking about it a bit more and see that A. is really unlikely. in fact too much cash in the system actually widens swap spreads by pressuring treasury yields. ctpy risk works the same way. if you want to arb it you need to be a payer and the ctpy needs to buy protection on your expected future exposure - which ceteris paribus should increase the swap rates. the fact that swap spreads are so tight rather shows no concerns with respect to credit risk.
The idea behind A and B are linked, to a certain extent. However, as you have realized, A should, all else equal, cause bonds to outperform swaps, rather than the other way round. In my view, it's the interplay between fundamental (public vs private deficits) and technical (increased swap demand) factors, but it would take too long to discuss.
I'll chime in - I'm not intimately familiar, but my reading has guided me to this as the catalyst for the unusual swap spread price: http://acrossthecurve.com/?p=8933 http://en.wikipedia.org/wiki/http:/.../11/mrs-watanabe-strikes-again-usd-swaps.html .....
Yes, the PRDC story is one of the contributors to increased demand for swaps. However, to be fair, effects such as this should be relatively short-lived. The more I think about it, the more it fundamentally makes sense, though. Most of the members of the LIBOR basket are supranational banks. Moreover, it's been shown that they are backstopped by the US govt. Long-dated swaps should trade through treasuries; that's what TBTF is all about.
the above does not explain why 30y is a big negative while 10y is positive... imo PRDC rehedging is tiny to explain the big negative spread. the impact of strong yen is felt more in the vol space. maybe 30y negative has more to do with Fed mortgage buying programs...?