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The amazing lure of floating rate

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 dealers say the proceeds of both tranches were swapped to floating-rate dollars.

The 5.45% five-year notes were priced at 84bp over treasuries or 3.5bp over mid-swaps. At the time, three-month Libor was 3.7%, so by swapping into floating rate Wal-Mart could secure funding of about 3.75%

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