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The key event in the dollar interest rate markets this week was Federal Reserve chairman Alan Greenspan's address to the US Congress.
Greenspan said real rates continued to be "fairly low," and added that the rally in the bond market since the Fed began raising rates last June was "a conundrum".
Treasuries sold off after these remarks, and yields headed towards their recent highs. By yesterday (Thursday) in New York, the two year Treasury was at 3.39% and the 10 year was at 4.20%, while the long bond was at 4.57%.
In the face of the sell-off and rising rates, medium term swap spreads have been indifferent.
By yesterday, the five year swap spread was at 38.75bp and the 10 year was at 37.75bp -- little changed on the week. Only at the long end of the curve have swap spreads responded to higher rates. The 30 year swap spread widened to 41.25bp.
These days it is normal for swap spreads to follow yields, chiefly as a result of convexity hedging by mortgage accounts.
The failure of swap...