On August 13, the two-year versus 30-year US treasury yield curve
gapped out to a seven-year high of 184 basis points. The two-year
treasury was trading at its lowest ever yield in the 25 years since
the two-year security was first introduced, and three-month Libor
was even lower at 3.57%. Moreover, with the US economy showing no
signs of recovery, short-end rates seem set to move even tighter.
The extraordinary steepness of the US yield curve has provided
mouthwatering swap opportunities for corporates that would not
normally consider conversion of fixed-rate liabilities to floating
rate. The greater than normal swap business has also put added
downward pressure on swap spreads.
For example, on July 27 discount retailer Wal-Mart brought to
market a $1.5 billion two-year global and a $1.5 billion five-year
global via Lehman Brothers and Goldman Sachs. Although the borrower
declined to comment on its debt-market activities, several New York
swap...
