We believe that the current 10yr US swap spread is extremely elevated in short term. On a 5yr time horizon chart, the spread current value is at 3 standard deviations from it’s mean. Statistically this is unsustainable. Last week’s widening in the above spread post US election results, appear to reflect a measure of deregulatory optimism particularly with regard to SLR relief for USTs. For some time, the potential for a UST exclusion from bank leverage capital rules has been much topic of speculation amongst market participants. Such speculation flows from the fact that there was a similar temporary reprieve during the onset of the pandemic. But the current levels of above spread looks exaggerated to us even assuming the above is likely. Even if banking system regulatory reforms are plausible, technical adjustments to SLR might not be at the top of agenda given there are other items which have far more impact in the BASEL III agenda. Further more, the time line is absolutely unclear. First the new administration has to take place, followed by time to appoint key personnel, then followed by the rule making process in Congress. Hence this is unlikely to affect the financing of USTs in the short run. Hence we believe this spread should normalise to 35/40 bps in short term. Currently its trading at 51 levels.
