Rates Market Update: US spreads hit four-year low

US swap spreads reached a four-and-a-half year low this week, as expectations of increased treasury issuance combined with a large amount of corporate activity brought an influx of floating rate receivers into the market. Ten-year swap spreads ended the week at 58.5 basis points, from 62bp last week, while five-year spreads narrowed by 4bp to 53bp.

Lower-than-expected tax receipts in the US this April – traditionally the main month for tax returns – led to expectations that the government will step up its bond issuance to make up its budget shortfall. This led to more floating receivers entering the market, grinding swap spreads narrower.

Euro interest rate swaps saw strong activity due to increased bond issuance. Ten-year spreads ended the week about 1.5bp tighter on a par asset-swap basis over Euribor at 21.4bp.

A trader at Morgan Stanley, based in London, who asked to remain unnamed, said swaps activity was a result of more issuers entering the market to take advantage of the steep yield curve. “All of the [bond] deals this week were swapped - at least 99%.”

The biggest issue was a €6 billion, 11-year bond by the Finnish government, the majority of which was swapped, dealers claimed.