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European Swap Rates

  • 17-12-2010 8:38am
    #1
    PH4T
    Registered Users, Registered Users 2 Posts: 931 ✭✭✭


    I noitce that European Swap Rates have been increasing rapidly since September.

    http://www.bloomberg.com/apps/quote?ticker=EUSA5:IND

    Does anyone know what drives changes in these rates?


Comments

  • #2
    soddy1979
    Registered Users, Registered Users 2 Posts: 284 ✭✭soddy1979


    Certainly the level of the yield curve will be the main driver. The 5 year has changed by about 85bps since the end of August. I think it's reasonable to attribute the remainder to increased credit risk, but I stand corrected on that.


  • #3
    PH4T
    Registered Users, Registered Users 2 Posts: 931 ✭✭✭PH4T


    soddy1979 wrote: »
    Certainly the level of the yield curve will be the main driver. The 5 year has changed by about 85bps since the end of August.

    Thanks. Then what drives changes in the level of the yield curve?


  • #4
    soddy1979
    Registered Users, Registered Users 2 Posts: 284 ✭✭soddy1979


    Numerous factors will drive the yield curve. Essentially, anything that effects supply and demand of a countries currency should effect the yield curve.

    For example, expansionary monetary policy, where a central bank pumps money into an economy will result in increased supply of a currency and therefore reduced interest rates. Conversely, if a central bank reduces the money supply we should get an increase in the level of the curve. Flight to quality will also reduce short term yields in whatever instrument is deemed "quality" at that point in time.

    Inflation expectations also effect the yield curve, but more the shape than the level. For example, deflationary fears in the short term coupled with inflationary fears in the long term will result in a steeper curve.

    I believe the short end of the curve, is more volatile than the long end also.


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