US SWAPS-Federal credit-crisis measures puncture spreads

(Updates market action)

By Richard Leong

NEW YORK, Sept 19 (Reuters) - The U.S. government's
sweeping moves to fight the credit crisis on Friday helped
restore investor confidence, deflating the risk spreads in the
dollar interest rate swap market.

The risk spread, or the cost to exchange U.S. two-year
fixed-rate for floating-rate interest payments, plunged. In a
roller-coaster session, it ended about 10 basis points tighter
on the day after falling more than 45 basis points below the
record high set on Thursday.

"Two-year swap spreads continued their exercise in motion
sickness," UBS Securities analysts said in a research note.

The two-year spread narrowing reflected improved market
confidence in reaction to the federal program aim at healing
the battered credit markets. Traders unwound safe-haven
holdings in cash and Treasuries and flocked back into stocks
and riskier bonds, analysts said.

On the day, the three-month Treasury bill rate US3MT=RR
soared back near 1 percent, up 78 basis points, while the yield
on benchmark 10-year notes US10YT=RR jumped a quarter
percentage point to 3.81 percent.

The most dramatic of the government's moves is a plan,
which the Treasury is working on, to take billions of dollars'
worth of illiquid mortgage assets off banks' books.

Other measures include a temporary ban on short-selling of
financial stocks; a guarantee program for money market mutual
funds; and opening up the Federal Reserve's discount window so
financial institutions can obtain funds to buy high-quality
asset-backed commercial paper. For more, see [ID:nN19459598]

The risk premium or spread on two-year interest rate swaps
over comparable Treasuries was 117.75 basis points in late
trading, versus 128.50 basis points late Thursday.

On the week, the two-year spread widened more than 20 basis
points.

Longer swap spreads also narrowed with 10-year spread
ending at 66.00 basis points from 68.00 basis points late on
Thursday.
(Editing by Leslie Adler)