Swap spread

Most of the rise in yields has reflected higher expected policy rates, although term premia have moved up more noticeably since Fed Chair Kevin Walsh's first FOMC meeting.

Test number three, swap spreads.

As a final robustness check, we examine swap spreads, which unlike term premia, are directly observable.

If investors were selling treasuries to absorb unexpected fixed rate AI bond supply, treasuries should cheapen relative to swaps, even if the signal in outright yields is noisy.

Once again, we find little systematic response around surprise issuance.

Bottom line, across nominal yields, term premia, and swap spreads, the evidence that surprise AI debt issuance is pushing treasury yields higher is weak.

The AI capex boom may well lift equilibrium real rates through the saving investment channel, but the narrower claim that AI bond supply is directly crowding out treasuries is hard to find in the data.

Thank you for listening.

For example, like 10-year bond yields are around 335 currently, which was last we saw was in 2011, I think.

The Euro swap yield are slightly better off in the sense like they're close to the level seen in 2023, when if you remember, there was aggressive mortgage-related paying that had pushed swap yields higher and swap spreads wider.

Now, even though yields are optically high, we find them only modestly cheap.

Recent moves in bond yields is fully explained by change in monetary policy pricing.

On the other hand, the long end, the 10-30s curve has been exhibiting a very strong and consistent negative relationship versus yields over the last several months.

We do have a steepening bias on the 10-30s curve, but that primarily reflects our bullish duration bias.

So if we maybe just think about swap spreads and despite the moves and the outright level of yields, German swap spreads have been pretty range bound with limited volatility.

And what do you think explains that? And do you think this range trading in swap spreads can continue?