Bloomberg News

Swap Spreads Widen Most Since November on European Debt Crisis

June 15, 2011

June 15 (Bloomberg) -- U.S. interest-rate swap spreads widened the most since November after Moody’s Investors Service said it may cut the credit ratings of three French banks with investments in Greece.

The difference between the U.S. two-year swap rate and the comparable-maturity Treasury note yield, known as the swap spread, widened 4.6 basis points to 24.75 basis points. That was the largest increase since Nov. 30 when the spread widened by 6.5 basis points. The spread is based in part on expectations for the London interbank offered rate, or Libor, and used to gauge investor perceptions of credit risk.

BNP Paribas SA, France’s biggest bank, and local rivals Societe Generale SA and Credit Agricole SA may have their credit ratings cut by Moody’s. The rating company placed the three banks’ ratings on reviews that will focus on their holdings of Greek public and private debt “and the potential for inconsistency between the impact of a possible Greek default or restructuring and current rating levels,” the ratings company said in a statement today.

“There is some worry that with what is going on in Greece there will be downgrades and this will cause a problem in funding and result in a rise in Libor,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG. “Swap spreads are widening as direct result of these concerns.”

The move by Moody’s reflects Europe’s deepening debt crisis, centered on Greece, where bond yields touched a record for the euro area today. Pressure on European governments to craft a second rescue plan for the country intensified this week after Standard & Poor’s slapped Greece with the world’s lowest credit rating.

A drop in Treasury two-year yields today also helped widen swap spreads. Yields on two-year notes dropped six basis points, or 0.06 percentage point, to 0.38 percent, the biggest since April 15 on an intraday basis.

Swap rates serve as benchmarks for investors in many types of debt, including mortgage-backed and auto-loan securities.

-- Editor: Paul Cox, Greg Storey

To contact the reporter on this story: Liz Capo McCormick in New York at

To contact the editor responsible for this story: David Liedtka at

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