Market participants who were shocked to see interest rate swap spreads move largely negative over the course of 2015 should expect more of the same in 2016. Swap rates in the 10-year and five-year portions of US interest rates curves fell below US Treasury debt yields for the first time this year and have remained in negative territory. The rate to receive fixed payments on a 10-year swap is currently 2.15%, compared with 2.21% for the 10-year US Treasury yield. The dislocation has been driven by regulatory constraints, making it harder for banks to finance positions in Treasuries, combined with a flood of US debt securities into the market via sales from foreign currency managers looking to defend their local currencies.
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