Swap spread: Difference between revisions

Revision as of 13:02, 4 June 2025

Revision as of 13:03, 4 June 2025

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==Variation across economies==

There is observable variance in swap spreads between economies. <ref name=Sclip />. This has been explained by variables which are the core fundamentals of what is used to price and determine the swap spreads within a given economy. The cost of repo financing, the price of bank credit or bank bonds, the gross issuance of bonds, that is the new supply of bonds within the market and the central bank within the specified economies share of the nominal bond market all determine the swap spread.<ref name=Louise /> Covid-19 has presented unique patterns in the performance of swap spreads as artificial fiscal supply of money and market arbitrage by algorithmic trading platforms have generated unusual outcomes such as negative swap spreads. The 10 year swap spread has been observed to trade through or below economies 10 year bonds such as the treasuries in the United States. This has been argued to be a result of governments issuing substantial supply of government debt to fund their growing fiscal deficits incurred due to covid-19 related expenditure. (Refinitive<ref Perspectivesname=Refini 2021)/> The performance of an economies stock market is also influential on swap spreads and vice versa. The stock market within an economy is unable to perform when swap spreads are negative or trading through the government bonds. A normalisation of swap spreads to be positive is seen as a signal of a resumption to the long standing bull stock market trend.

==References==