Forex Investment and Currency Trading

Two year swap spreads briefly breached 100 bps last Friday as concerns over accurate LIBOR fixing levels rolled through the market. Illustrating the decoupling to credit markets, IG spreads tightened by 7 bps and banks were tighter by 12 on the heels of strong equity markets. The trouble with LIBOR lies with
its essence: one borrowing rate to reflect the overall rates to all panel bank members. That works when both overall bank risk is low and the dispersion of risks across banks is small. Both are clearly not the case currently. The variability in individual 3 month offered rates stood [...]

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The FED cut the FF rate by 0.75% to 2.25% yesterday. The spread between 2-year yields and the FF rate factored into the market had widened to about 1.7% at the beginning of the week in what was a very unusual situation, so the current measures were to correct being behind the curve. Even though 2-year bond yields rose yesterday, the level had fallen to the lowest levels of 2003, when the FF rate was at 1%, and the market is concerned about this trend being revisited. The current action involves a reduction in the spread to about 0.7%, with [...]

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Flows were light ahead of upcoming national holidays (Japan is closed tomorrow and US/Europe on Friday.. London still closed on Monday). We saw significant curve flattening and could see some renewed interest in the 5yr area if flattening bias continues offering improved yields in the intermediate sector.Dollar swap spreads were 2bps tighter across the curve..

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