Just a short comment regarding the negative swap spread story Eoin posted: I've heard rumours about the Chinese selling large volumes of US treasuries, more than what the market can absorb. This due to their own domestic policy challenges recently. The heavy selling has depressed bond prices/pushed up yields, to unnatural levels compared to swaps. Just a rumour (I'm in no position to confirm it) but sounds plausible to me. If you have further views on this, I would be very interested.

Eoin Treacy's view

Thank you for this information and I have also read about Chinese liquidation of Treasuries. At least part of the reason for this is because they are no longer holding back the appreciation of the Yuan but rather selling Dollars to slow its decline. This has removed a potent source of demand for Treasuries. 

I was also intrigued by negative swap spreads at progressively shorter durations and reached out to a subscriber with a lot more experience of the bond markets than I do.  She sent out some feelers and came back with feedback received from an informed acquaintance. “Apparently has to do with corporate bond sales and hedging via swaps rather than bonds due to new regulatory environment.” This also rhymes with some of the points made in the article I posted yesterday and suggests the condition may persist for a while longer. 

It also highlights the fact that quantitative easing and the regulatory response to the credit crisis have created dislocations in the bond markets and that the normalisation of monetary policy represents a challenge for these markets.