Hidden price pressures grow in euro swap market
Users of euro interest rate swaps should expect bid/offer spreads to widen, dealers are warning – a consequence of shrinking liquidity in the markets banks use to hedge, such as the Bund future. Fierce competition and a drive to internalise more flow has shielded clients so far
Clients appear to be getting an increasingly good deal in the euro interest rate swap market, as liquidity drains from the products traditionally used by dealers to hedge themselves – a phenomenon that is driving up risk and cost for the sell side, but has so far hardly touched the bid/offer spreads charged to customers.
The question is how long it will last. Capital pressures were already making it harder for banks to run large swap books before the market for Bund futures – the initial hedge
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