TREASURIES-30-year swap spreads approach parity; prices slip

Mon Apr 8, 2013 3:49pm EDT

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    By Richard Leong and Luciana Lopez
    NEW YORK, April 8 (Reuters) - A key measure of the
difference between long-term U.S. borrowing costs and private
borrowing costs neared parity for the first time in four years
on Monday as a massive Bank of Japan stimulus program left
investors searching for higher-yielding assets.    
    The 30-year swap spread, or the cost of
exchanging 30-year fixed-rate interest payments for floating
rates, was quoted at minus 4.25 on Monday. That figure last hit
parity on Jan. 9, 2009.
    The U.S. Treasury market was relatively quiet, with
long-dated bonds selling off modestly late in the session as
U.S. stocks recovered. 
    The move in swap spreads comes on the search by Japanese
investors for yield abroad as the Bank of Japan's stimulus plan
took the return on government debt there to record lows last
week and the yen to multi-year lows against the dollar.
    The trend toward lower yields and a weaker yen began last
year, but last week's announcement of a $1.4 trillion stimulus
program by the Bank of Japan sped those moves up.
    Traders are now speculating that some dealers must close out
their current 30-year swap positions, which they use to hedge
investments known as power reverse dual current notes (PRDC)
they sold earlier to investors.
   The notes were popular before the credit meltdown, but an
estimated $40 billion to $50 billion remain outstanding. The
notes let yen-based investors take advantage of higher U.S.
interest rates as Japanese rates go down.
    As a result, the movements of the yen have become especially
important for the long end of the Treasuries curve, said David
Keeble, global head of interest rate strategy at Credit
Agricole.
    Once the yen hits 100 per dollar or so, the notes are
triggered and called, he said. The yen traded as low as 99.32
per U.S. dollar on Monday.
    "If there's uncertainty you just don't really want to
receive on the 30," he added.
    Big moves in the yen - which has fallen against the dollar
in the wake of the BoJ move - get longer-dated swap spreads
jittery as a result, Keeble said.
    "We're in for a little volatility," he said.    
    Like the U.S. Federal Reserve's bond purchase programs, the
BoJ's quantitative monetary policy aims to lower long-term
borrowing costs and stimulate spending and investments.
Moreover, the depreciation of its currency should help Japanese
exporters by making their goods cheaper abroad.
    Prices for U.S. Treasuries dipped slightly on Monday after
last week's rally.
    Benchmark yields hovered near the lows for the year set on
Friday in the wake of very disappointing data on the U.S. jobs
market and the Bank of Japan's plan to buy $1.4 trillion in
assets. The two factors forced traders to downgrade their
outlook on the U.S. economy and revise up their view on foreign
appetite for dollar-denominated debt.
    "The market is taking a bit of a breather and digesting the
two big surprises from last week," said Michael Brandes, global
head of fixed income strategy at Citi Private Bank in New York.
    Benchmark 10-year Treasury notes traded down
5/32 in price for a yield of 1.732 percent, from 1.7145 percent
late on Friday. 
    Prices for 30-year bonds slipped 17/32 to yield
2.902 percent from 2.8766 percent late on Friday.
    As part of its own stimulus, the U.S. Federal Reserve on
Monday bought $1.399 billion in Treasury inflation-protected
securities, which was the latest part of its bond purchase
program intended to lower long-term borrowing costs and to lower
unemployment. 
    In light of the market rally, which made Treasuries more
expensive, analysts said some investors might bid less
aggressively for this week's government debt supply.
    The U.S. Treasury Department will sell $32 billion in
three-year debt on Tuesday ; $21 billion in
10-year notes on Wednesday ; and $13 billion in
30-year bonds on Thursday.
    Still, overall demand for the latest Treasuries supply
should be solid as traders brace for a possible pickup in
Japanese appetite for Treasuries, according to Citi's Brandes.
    "I expect fairly strong auctions this week even after we had
a substantial rally," said Michael Brandes, global head of fixed
income strategy at Citi Private Bank in New York. "We could see
some flows out of large Japanese institutions."
    In "when-issued" activity, traders expected the upcoming
three-year note issue to yield 0.342 percent.
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