Surface tension

Subprime losses still to be uncovered and uncertainty about monetary policy mean a return to normality in the swaps market is still some way off. Recovery is closer than a month ago, but the pace of normalisation might be slower than previously expected. Christophe Duval-Kieffer takes a closer look and suggests the lessons that can be learned

Recent swaps movements have proved a central concern for investors and are one of the factors driving the lack of confidence in the financial system. Such movements have also clearly impacted hedgers, who are now confronted with more complex decisions as far as the timing and, more importantly, the cost of their interest rate hedges are concerned. The subprime meltdown has introduced unusual twists and turns to the rate surface and the volatility surface (see box). Normalisation has not yet