At Any Rate US Rates: DM swap spread outlook
Jun 27, 2025
Khagendra Gupta, the Head of European Interest Rate Derivatives Strategy at JPMorgan, joins to discuss the intricacies of developed market swap spreads, focusing on the U.S. and German markets. He delves into the impact of central bank balance sheets and the LIBOR transition on U.S. swap spreads. Gupta also analyzes the zero duration spread and regulatory impacts on the market, while providing insights on the outlook for German swap spreads and the fiscal influences shaping international swap spread dynamics.
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Key Drivers of DM Swap Spreads
- Developed a PCA model showing central bank balance sheets and money market rates as key common drivers of DM swap spreads.
- These drivers impact swap spreads through collateral scarcity and money market rate sensitivities.
US Swap Spread Term Funding Premium
- The term funding premium (TFP) explains US swap spread slope and reflects supply-demand and liquidity balance.
- Ongoing QT and supply growth drive TFP higher, pressuring spreads amid somewhat weaker foreign demand.
Understanding US Zero Duration Spread
- Zero duration spread (ZDS) indicates funding pressure and deleveraging risks in US swap spreads.
- It declines with leverage cost rises but benefits from expected lower implied volatility and term funding premium substitution effects.