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The forint interest rate swap market and the main drivers of swap spreads

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  • Csaba Csávás

    ()
    (Magyar Nemzeti Bank)

  • Lóránt Varga

    ()
    (Magyar Nemzeti Bank)

  • Csaba Balogh

    ()
    (Magyar Nemzeti Bank)

Abstract

In our paper we present the most important characteristics of the forint interest rate swap market, as well as examine the determinants and the information content of the forint interest rate swap spreads. The turnover of the forint interest rate swap market has grown dynamically in recent years, and now it may reach, or even exceed, the turnover of the government bond market. Due to the hedging activity of interest rate swap market makers, there is a close linkage between the forint interest rate swap market and the government bond market. In terms of investors, the interest rate swap and government bond markets are strongly segmented. Consequently, the spillover from one market segment to the other is not perfect. Our analyses suggest that long-term forint interest rate swap spreads are exposed to the common impact of several factors. The strongest effects are attributed to government bond purchases by residents, the Maggie A spread, the slope of the yield curve and the forint/euro forward yield spread. In the developments of swap spreads, the impact of those trading strategies employing interest rate swaps can be detected. These are widespread in the domestic market, as is confirmed by anecdotal information. The results indicate that in certain cases the swap yields, while at other times the government bond yields carry additional information about long-term yield expectations. The values of the 5-year HUF/EUR forward spread 5 years ahead calculated from the swap yields and from the treasury yields differ markedly, and this difference is driven practically by the same factors that influence the interest rate swap spreads.

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Bibliographic Info

Paper provided by Magyar Nemzeti Bank (the central bank of Hungary) in its series MNB Occasional Papers with number 2008/64.

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Length: 43 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:mnb:opaper:2008/64

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Keywords: forint interest rate swap market; government securities market; interest rate swap spread; swap spread model.;

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References

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  1. Heppke-Falk, Kirsten H. & Hüfner, Felix P., 2004. "Expected budget deficits and interest rate swap spreads - Evidence for France, Germany and Italy," Discussion Paper Series 1: Economic Studies 2004,40, Deutsche Bundesbank, Research Centre.
  2. Afonso, Antonio & Strauch, Rolf, 2007. "Fiscal policy events and interest rate swap spreads: Evidence from the EU," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(3), pages 261-276, July.
  3. John Kambhu, 2004. "Trading risk and volatility in interest rate swap spreads," Staff Reports 178, Federal Reserve Bank of New York.
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Cited by:
  1. Áron Gereben & István Mák, 2010. "Potentials and limitations of non-governmental forintdenominated bond issues by non-residents," MNB Bulletin, Magyar Nemzeti Bank (the central bank of Hungary), vol. 5(3), pages 29-39, October.
  2. Zsófia Ãrvai & Geoffrey Heenan, 2008. "A Framework for Developing Secondary Markets for Government Securities," IMF Working Papers 08/174, International Monetary Fund.

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