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2y swap spreads have dipped below zero for the first time. Can this stay negative and invert more? If my math is correct, the negative swap spread for the 2y leg suggest that the expected path of 3-month libor - 3-month repo is negative which doesn't make sense because libor is unsecured and repo is collateralized.

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Yes, it does suggest that. However the only way to arbitrage that is to hold the Treasury until maturity. So you need balance sheet to be made available for 2yrs. Right now balance sheet is scarce -bank balance sheets are full and the Treasury is issuing a lot of paper. Hence the market charges a lot to hold that trade. The longer the maturity of the treasury, the more it charges. (10yr spreads are -13 I think).

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  • $\begingroup$ Thanks, would only hold this trade to maturity if the path of realized libor is higher than the path of realized repo This implies that your swap spread which is negative now ages into positive territory. Is this correct? $\endgroup$ – VanillaCall Aug 8 '19 at 23:58
  • $\begingroup$ Correct, swap spread would drift positive $\endgroup$ – dm63 Aug 9 '19 at 0:07

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