Trump deregulation push boosts appeal of swap spread wideners in bond market

NEW YORK, March 4 (Reuters) - A potential move by the Federal Reserve to ease regulations on capital for U.S. banks that would allow them to hold more Treasury securities has unleashed a torrent of so-called swap spread wideners in the bond market.

These are bets that increase demand for U.S. Treasuries that will push their yields lower and closer to those of a competing class of risk-free assets called interest rate swaps. Analysts said this trade has already been successful this year.

The trade has become popular since the November 5 U.S. election on expectations President Donald Trump's administration will push through deregulation, particularly making capital adequacy rules less restrictive for banks.

"Markets have seized on the possibility that looser regulation will free up some capacity for banks to hold more bonds, especially in times of stress," said Steven Major, the global head of fixed income research at HSBC in Dubai.

"Early positioning from hedge funds was on the view that regulations would be adjusted. There is more to go."

Swap spreads are a major component of the more than $500-trillion interest rate derivatives market. They express the basis-point difference between the fixed rate of an interest rate swap tied to the current Secured Overnight Financing Rate (SOFR) and the Treasury yield of the same maturity.

Investors and corporations use swaps to hedge interest rate risk or their exposure to U.S. Treasuries, allowing them to exchange fixed-rate cash flows for floating-rate ones, or vice vers...
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