On October 23, 2008, something strange happened in the swaps market. Given that Lehman had filed for bankruptcy only a month before it was only one of many unthinkable events taking place, but on that day the 30-year swap rate traded below the 30-year treasury rate for the first time. This shouldn’t happen.
Swap spreads reflect the cost of funding a long treasury position, so negative spreads mean that it costs more to borrow cash for 30 years secured against treasuries than to borrow unsecured for 30 years.
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