The U.S. 30-year swap spread provides rich information into market sentiment, credit risk, risk appetite and liquidity.
A wider spread indicates greater private sector risk associated with holding longer-term debt while a narrower spread typically indicates lower market stress.
Read more of RSM’s insights on the economy and the middle market.
The 30-year swap is pointing toward greater risk in U.S. Treasury funding as trade and fiscal policies suggest higher inflation, rising interest rates and growing government deficits to fund a large tax cut.
The 30-year swap spread is a critical instrument for hedge funds, pensions and insurance firms that need to manage interest rate risk while matching the duration of their liabilities.
As borrowing costs soar in the United States and other nations like Germany and Japan that issue a lot of debt, a popular trade that posits Treasuries will outperform interest rate swaps may be upended.
Market positioning in the long-dated market may have been organized around an assumption that the supplementary leverage ratio—which states that banks keep at least 5% of their capital against all assets regardless of risk—may be eased.
There may be some unusual moves at the long end of the Treasury curve should the trading community choose to unwind that trade.
Such trades are sensitive to policy pronouncements around tariffs and banking regulations.
