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US SWAPS-Spreads shrink on mortgage hedging anxiety
Reuters, 02.18.04, 6:10 PM ET
NEW YORK, Feb 18 (Reuters) - U.S. swap spreads shrank on Wednesday thanks to worries about mortgage bond portfolios needing to hedge against lower rates and the almost certain swapping of Lehman Brothers $1.25 billion debt sale.
An early slide in the dollar promised the bond market yet more central bank intervention to prop up the greenback, helping drive the 10-year yield to 4.00 percent, just above the bottom end of the big seven-month range between 3.90 percent and 4.60 percent. But when the dollar reversed and rebounded, the 10-year yield ended the session at 4.05 percent. Swap spreads still managed to hold their earlier tightening as fears about mortgage portfolios and servicers needing to hedge against lower rates sparked some receiving of fixed-rates in the market, which helps drive spreads lower.
The two-year spread performed the best, reflected in the December 2004 Eurodollar contract <EDZ4> closed again at its highest level in nearly eight months, after comments from Federal Reserve Chairman Alan Greenspan last week eased worries at a potential rate hike. The two-year spread shrank to 32 basis points from 32-3/4. Both the five- and 10-year spreads shrank a quarter-basis point to 38-1/4 basis points respectively, while the swap curve, taking the difference between two- and 10-year swap rates, steepened to 244 basis points. "The fear is in the system," said Fidelio Tata, an interest-rate strategist at Credit Suisse First Boston, describing the worries of mortgage portfolio hedging. Such hedging can quickly push swap spreads sharply in either direction.
Despite those fears, gauges of interest-rate volatility declined again on the session as the range trade was expected to stay in place. Strategists said market sentiment was for selling volatility in anticipation of yet more calm waters ahead for interest rates. "There's no big number coming up and no real surprise around the corner," Tata said. Lehman Brothers sold $750 million of 10-year notes and $500 million of five-year notes in a deal widely expected to be swapped to short-term floating rates, as investment banks typically do to better match their assets with liabilities.
National Rural Utilities sold $600 million of 10-year notes. Next up on the economic data calendar is the Philadelphia Federal Reserve's survey of regional manufacturing. Economists expect the index to slip from its 20-year high hit in January but still show robust growth. Market players will closely watch the employment index for signs that the strong demand and production is leading to better hiring. --
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