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Deutsche Bank: "This Is Yet Another Sign Showing How Broken The Financial Market Is Around The World"

Two days ago we pointed out the dramatic plunge in the 10 Year swap spread in the aftermath of last week's TLAC announcement, which just yesterday tumbled to negative record lows of -0.18% in a move that few can explain, even if many explanations have been offered. Here is DB's Jim Reid with what is perhaps the best "explanation" of what has happened.

From DB:

It's worth highlighting the stunning move of swap spreads of late and especially in the last 24 hours. 10 year US swap spreads yesterday hit a record low of nearly -18bp before closing at -12bp. The exact reason for the sharp move is unclear but blame has been placed on high corporate issuance (current and future with the WSJ discussing future high US bank TLAC issuance), balance sheet re-pricing into year-end given tighter regulatory pressure (on balance sheet USTs more expensive than swaps) and also the poor liquidity which as we know has the habit of exacerbating moves in many markets these days. You can see how savage the recent move has been with the chart below going back to 1988. This is yet another sign showing how broken the financial market is around the world. Normally you have tight swap spreads when Governments are issuing like crazy (not the case in the US) or if bank credit quality was perceived to be very strong (not really where we are today). Before September we'd only ever seen negative 10y swap spreads for a period in 2010 although they did turn negative intra-day 3-years ago. It’s not quite up there with the flash rally/crash in Treasuries 13 months ago but it’s a very strange occurrence and one to watch and likely another product of regulation and liquidity.