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Report
Trends in credit market arbitrage
Market participants and policymakers alike were surprised by the large, prolonged dislocations in credit market arbitrage trades during the second half of 2015 and the first quarter of 2016. In this paper, we examine three explanations proposed by market participants: increased idiosyncratic risks, strategic positioning by some market participants, and regulatory changes. We find some evidence of increased idiosyncratic risk during the relevant period but limited evidence of asset managers changing their positioning in derivative products. While we cannot quantify the contribution of these ...
Journal Article
Negative swap spreads
Market participants have been surprised by the decline of U.S. interest rate swap rates relative to Treasury yields of equal maturity over the past two years, with interest rate swap spreads becoming negative for many maturities. This movement of swap spreads into negative territory has been attributed anecdotally to idiosyncratic factors such as changes in foreign reserve balances and liability duration management by corporations. However, we argue in this article that regulatory changes affected the willingness of supervised institutions to absorb shocks. In particular, we find that ...
Journal Article
Trends in credit basis spreads
Market participants and policymakers were surprised by the large, prolonged dislocations in credit market basis trades during the second half of 2015 and the first quarter of 2016. In this article, we examine three explanations proposed by market participants: increased idiosyncratic risks, strategic positioning by asset managers, and regulatory changes. We find some evidence of increased idiosyncratic risk during the relevant period, but limited evidence of asset managers changing their positioning in derivative products. Although we cannot quantify the contribution of these two channels to ...
Discussion Paper
Credit Market Arbitrage and Regulatory Leverage
In a companion post, we examined the recent trends in arbitraged-based measures of liquidity in the cash bond and credit default swap (CDS) markets. In this post, we turn to the mechanics of the CDS-bond arbitrage trade and explore how the costs and profitability of such trades might be affected by the finalization of the supplementary leverage ratio (SLR) rule in September 2014.