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Negative swap spreads


  • Nina Boyarchenko
  • Pooja Gupta
  • Nick Steele
  • Jacqueline Yen


Market participants have been surprised by the decline of U.S. interest rate swap rates relative to Treasury yields of equal maturity over the past two years, with interest rate swap spreads becoming negative for many maturities. This movement of swap spreads into negative territory has been attributed anecdotally to idiosyncratic factors such as changes in foreign reserve balances and liability duration management by corporations. However, we argue in this article that regulatory changes affected the willingness of supervised institutions to absorb shocks. In particular, we find that increases in the required leverage ratio may have changed the breakeven level of the swap spread at which market participants are willing to enter into spread trades. We present a stylized example of these economics, illustrating how a higher leverage ratio can help explain these historic movements in swap spreads.

Suggested Citation

  • Nina Boyarchenko & Pooja Gupta & Nick Steele & Jacqueline Yen, 2018. "Negative swap spreads," Economic Policy Review, Federal Reserve Bank of New York, issue 24-2, pages 1-14.
  • Handle: RePEc:fip:fednep:00047

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    References listed on IDEAS

    1. Adriano A. Rampini & S. Viswanathan & Guillaume Vuillemey, 2020. "Risk Management in Financial Institutions," Journal of Finance, American Finance Association, vol. 75(2), pages 591-637, April.
    2. Tobias Adrian & Nina Boyarchenko, 2012. "Intermediary leverage cycles and financial stability," Staff Reports 567, Federal Reserve Bank of New York.
    3. Nicolae Gârleanu & Lasse Heje Pedersen, 2011. "Margin-based Asset Pricing and Deviations from the Law of One Price," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1980-2022.
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    Cited by:

    1. Urban Jermann, 2019. "Negative Swap Spreads and Limited Arbitrage," NBER Working Papers 25422, National Bureau of Economic Research, Inc.
    2. Nina Boyarchenko & Thomas M. Eisenbach & Pooja Gupta & Or Shachar & Peter Van Tassel, 2018. "Bank-intermediated arbitrage," Staff Reports 858, Federal Reserve Bank of New York.
    3. Benos, Evangelos & Huang, Wenqian & Menkveld, Albert & Vasios, Michalis, 2019. "The cost of clearing fragmentation," Bank of England working papers 800, Bank of England, revised 22 Nov 2019.

    More about this item


    U.S. Treasuries; interest rate swaps; funding liquidity; post-crisis regulation;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation


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