Only a few hours ago, I mentioned that the 30 yr hit 370 bp, well things move quickly, closing yield was a record low 345 bp, down 45 bp on the day.
The 30 yr swap spread last seen at negative 60…(remember this is not supposed to happen..)
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November 20th, 2008 at 6:15 pm
Absolutely stunning! At least our cost of borrowing should go down!
A lot of amusing problems though. I was just called in to help resolve a problem at a hedge fund. Their risk systems can’t handle negative swap spreads (you just can’t enter a negative number for the swap spread)!
November 20th, 2008 at 6:44 pm
That reminds me when silver went above $10, computer wasn’t ready…
I suspect we are going to hear about some serious damage with the negative swap spreads…
November 20th, 2008 at 7:46 pm
Systems engineers are having to reckon with more than just negative swap spreads… the yield on the 10yr TIPS was below the 10yr T-note yield today a few times (and closed 1bp apart). Since the notes have a floor at 0% inflation, there’s no possible inflation number which can produce that result. Some models then vary other parameters and end up with really wacky forward rates.
November 20th, 2008 at 9:48 pm
I just got a call from an NYC bank — their system can handle neither negative spreads nor negative rates (as could happen with Tbills).
Also looks like the valuation on hundreds of legacy CMT swaps are failing becuase of the negative spreads. At least the banks hope the valutions are failing.
November 21st, 2008 at 6:57 am
Steve L:
It is not abnormal for TIPS to yield more than plain vanilla treasuries, the TIPS do NOT have a 0% inflation floor, only the principal at maturity has a par floor, it can be adjusted below par before that, see this (from the treasury):
What happens to TIPS if deflation occurs?
The principal is adjusted downward, and your interest payments are less than they would be if inflation occurred or if the Consumer Price Index remained the same. You have this safeguard: at maturity, if the adjusted principal is less than the security’s original principal, you are paid the original principal.