According to sources at Ovetii, the rate on a U.S. two-year interest-rate swap, used by companies and investors to hedge against changes in interest rates, fell below its counterpart in Europe by 0.01 percentage points yesterday. The two-year U.S. swap rate was one percentage point more than those in Europe at the start of the year.
A senior Ovetii analyst reportedly stated that expectations for more Federal Reserve interest rate cuts combined with the European Central Bank's obstinacy in seeing the shadow of inflation lurking behind every tree in the background is narrowing the swaps spread, A move in the spread between U.S. and European two-year swap rates to minus 20 basis points is certainly feasible.
Ovetii researchers are apparently of the opinion that a further narrowing of the spread will benefit holders of agreements to receive fixed-rate payments on U.S. swaps, and to pay fixed-rate payments on European swaps. An Ovetii source have stated that soaring trading volume in the swap market has increased its allure to investors. The average daily turnover in interest-rate swaps soared 95 percent in the last three years to $1.21 trillion a day, according to a Bank for International Settlements survey released last month.
