Dollars and Jens
Wednesday, February 25, 2009
"risk free" default probabilities
Say, has anyone noticed that 30-year swap spreads have gone negative? (I'm sure the traders have.)
Google is my friend; this was much crazier in November, and the FT was apparently on top of it in October:
On Thursday, the 30-year swap spread turned negative after briefly flirting with such levels earlier this month. This implies investors are somehow reckoning that they are more likely to be paid back by a private counterparty than by the government.Yeah, just like negative interest rates.
"Negative swap spreads have been considered by many to be a mathematical impossibility, just like negative probabilities or negative interest rates," said Fidelio Tata, head of interest rate derivatives strategy at RBS Greenwich Capital Markets.
We're now approaching the anniversary of the demise of Bear Stearns. It's been a good year for economic cryptozoology.