(Bloomberg) – Concern over an emerging liquidity crisis is causing global bond markets to bubble.
A key indicator of banking sector risk, known as the FRA / OIS spread, has reached its highest level in almost two years, as dollar swap spreads widened, suggesting that market tensions Americans are becoming more and more severe. Here are five graphs to watch for more anxiety:
The collapse of the FRA / OIS spread over two days – a benchmark in the American money market that measures the rate difference between forward rate agreements and overnight index swaps – shows an increased perception of risk interbank loan or dollar hoarding. The gauge went from around 12 basis points at the end of February to over 50 basis points on Friday before betting.
A similar measure for euros has widened to a level not seen since September, while futures contracts on Euribor – the European bank interest rate – have fallen. On Thursday, speculative puts were picked up, covering a larger drop, despite traders’ prices at around 9 basis points from European Central Bank rate cuts next week.
Swap spreads in the United States have widened, indicating higher levels of risk perceived by counterparties in interest rate swap agreements. The two-year sector has reached its highest level in over a year.
“We are on the alert for any overflow not only in today’s financing but also in the credit markets,” wrote NatWest strategists led by John Briggs in a note to clients. “We are concerned that there are skeletons in closets that we may not be aware of that come out in times like this, particularly the leverage of the shadow banking system.”
Currency swaps – the rate that international investors pay to change their local currency to dollars – have also shown a surge in demand for the greenback.
The three-month yen base hit its widest levels of the year, and similar swaps in euros and pounds sterling also experienced increased volatility.
The volatility of American rates is on fire, with the widening of swap spreads and triggers of convexity on traders’ radars. The three-month and 10-year swaption reached its highest level since 2016, quickly approaching 100 basis points of annualized volatility on Friday.
On Friday, the cost of protection against defaults on premium credit reached its highest level in more than a year, adding to the aggressive movements of the previous day.
Traders are struggling to digest the impact of the coronavirus on the economy and their jobs, spurring an epic recovery in global bonds. Stocks around the world have collapsed and bets on further central bank easing have increased, but many are now concerned that this volatility will hurt liquidity.
“We are looking at the abyss of a credit crunch,” said Kaspar Hense, portfolio manager at BlueBay Asset Management, noting in particular the widening of the FRA / OIS dollar.
(Updates throughout.)
To contact journalists on this story: Edward Bolingbroke in New York at [email protected]; Alexandra Harris in New York at [email protected]; Stephen Spratt in Hong Kong at [email protected]
To contact the editors responsible for this story: Benjamin Purvis at [email protected], Rachel Evans, Debarati Roy
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(Bloomberg) – Concern over an emerging liquidity crisis is causing global bond markets to bubble.
A key indicator of banking sector risk, known as the FRA / OIS spread, has reached its highest level in almost two years, as dollar swap spreads widened, suggesting that market tensions Americans are becoming more and more severe. Here are five graphs to watch for more anxiety:
The collapse of the FRA / OIS spread over two days – a benchmark in the American money market that measures the rate difference between forward rate agreements and overnight index swaps – shows an increased perception of risk interbank loan or dollar hoarding. The gauge went from around 12 basis points at the end of February to over 50 basis points on Friday before betting.
A similar measure for euros has widened to a level not seen since September, while futures contracts on Euribor – the European bank interest rate – have fallen. On Thursday, speculative puts were picked up, covering a larger drop, despite traders’ prices at around 9 basis points from European Central Bank rate cuts next week.
Swap spreads in the United States have widened, indicating higher levels of risk perceived by counterparties in interest rate swap agreements. The two-year sector has reached its highest level in over a year.
“We are on the alert for any overflow not only in today’s financing but also in the credit markets,” wrote NatWest strategists led by John Briggs in a note to clients. “We are concerned that there are skeletons in closets that we may not be aware of that come out in times like this, particularly the leverage of the shadow banking system.”
Currency swaps – the rate that international investors pay to change their local currency to dollars – have also shown a surge in demand for the greenback.
The three-month yen base hit its widest levels of the year, and similar swaps in euros and pounds sterling also experienced increased volatility.
The volatility of American rates is on fire, with the widening of swap spreads and triggers of convexity on traders’ radars. The three-month and 10-year swaption reached its highest level since 2016, quickly approaching 100 basis points of annualized volatility on Friday.
On Friday, the cost of protection against defaults on premium credit reached its highest level in more than a year, adding to the aggressive movements of the previous day.
Traders are struggling to digest the impact of the coronavirus on the economy and their jobs, spurring an epic recovery in global bonds. Stocks around the world have collapsed and bets on further central bank easing have increased, but many are now concerned that this volatility will hurt liquidity.
“We are looking at the abyss of a credit crunch,” said Kaspar Hense, portfolio manager at BlueBay Asset Management, noting in particular the widening of the FRA / OIS dollar.
(Updates throughout.)
To contact journalists on this story: Edward Bolingbroke in New York at [email protected]; Alexandra Harris in New York at [email protected]; Stephen Spratt in Hong Kong at [email protected]
To contact the editors responsible for this story: Benjamin Purvis at [email protected], Rachel Evans, Debarati Roy
bloomberg.com“data-reactid =” 43 “> For more articles like this, visit us on bloomberg.com
Subscribe now to stay one step ahead of the most trusted source of business information. “data-reactid =” 44 “> Subscribe now to stay ahead with the most trusted source of business information.
© 2020 Bloomberg L.P.