Initial flurry then calm after French agency swap postponement

The European interest rate swaps market reacted relatively calmly to the decision late yesterday by the French debt management agency, Agence France Trésor’s decision to suspend its swaps programme. European swap spreads over underlying treasuries of the same maturity widened by about 2bp to 3bp across the curve.

The Trésor said it suspended its programme due to increased volatility in the bond markets over the past couple of months. Traders reported thin liquidity yesterday, with most investors hesitant to commit themselves to the market. “This may be the calm before the storm,” said one European swaps broker. “If there had been much liquidity we may have seen some real carnage.” The broker added that the next few days could see increased activity as investors decide whether there may be an alternative