US SWAPS: Spread Widening Extends After Bowman's Reg Comments, Long End Leads

U.S. swap spread widening extends further today, with long end spreads continuing to react the most (30-Year spread ~5bp wider since Tuesday’s close).

• Two factors have driven the move:

1. No change in guidance within the Treasury’s quarterly refunding announcement, which continued to note that “based on current projected borrowing needs, Treasury anticipates maintaining nominal coupon and FRN auction sizes for at least the next several quarters.” The market had clearly priced some odds of a guidance tweak after Trump’s election victory.
2. Comments from Fed Governor Bowman (one of the favourites to replace outgoing Vice Chair for regulation Barr), suggesting that “where we can take proactive regulatory measures to ensure that primary dealers have adequate balance sheet capacity to intermediate Treasury markets, we should do so. This could include amending the leverage ratio and G-SIB surcharge regulations for the largest U.S. banks.” This drove most of the widening.

• A tighter regulatory environment has been one of the key drivers of longer run swap spread tightening, owing to reduced financial intermediation capabilities and lower liquidity in Tsy markets.
• A reminder that news that Barr would be stepping down from his role drove a similar spread widening episode in January, in anticipation of a looser regulatory environment.

Fig. 1: U.S. 10- & 30-Year Swap Spreads (bp)

Source: MNI - Market News/Bloomberg