MONEY MARKETS-Wider swap spreads reflect Europe concerns

* Worries on European contagion weaken dollar rate swaps

* Thin, holiday volume compounds swap spread widening

* U.S. bond market to close on Thursday
(Updates with U.S. action, changes dateline, previous London)

By Karen Brettell

NEW YORK, Nov 24 (BestGrowthStock) – Concerns about spreading
financial problems in peripheral European nations combined with
illiquidity ahead of the U.S. Thanksgiving holiday to push
shorter-dated interest rate swap spreads wider on Wednesday.

Treasury prices, in contrast, eased across the curve after
Tuesday’s safehaven bid sparked by tensions in Korea and fears
Ireland’s financial woes would spread.

“The events going on in Ireland and Europe are having a
significant effect here,” Thomas Simons, money market economist
at Jefferies & Co. in New York, said of swap spreads. “The move
is not a blowout, but considering that they’ve been so steady
over the last several months even in the face of these
developing problems in the periphery and known problems in
Greece, it’s a pretty substantial move.”

The spread on two-year U.S. swaps over Treasuries expanded
to 23.00 basis points from 18.25 basis points late Tuesday,
while three-year swap spreads widened to 23.25 basis points
from 21.50 basis points on Tuesday.

Weakness accelerated after a $29 billion auction of
seven-year Treasuries saw weak demand for the debt.

Treasuries eased as strength in stocks undermined the
safehaven appeal of government debt and after a raft of data
presented a mixed picture on the state of the economy. For
details, see [ID:nN24329899]

Ireland’s government on Wednesday unveiled a 15 billion
euro ($20 billion) four-year austerity plan that foresees deep
spending cuts and tax increases to help pay for a catastrophic
bank crisis and meet the terms of an EU/IMF rescue.

Declining liquidity ahead of Thanksgiving on Thursday may
have also exaggerated Wednesday’s moves, said Jefferies’
Simons. That said, swaps could face even more volatility when
traders return from the holiday.

“The problems in Europe aren’t going to go away given the
prospects for disruptions in interbank funding due to all these
banks’ exposure to each other and to sovereign debt. I think
the prospects for wider Libor fixings and associated widening
in other spreads is probably pretty likely,” he said.

Over-the-counter swap contracts are underwritten by
credit-worthy banks which in turn hedge their exposure with
other AA-rated banks. Uncertainties over the global financial
system, such as this recent flare-up in Europe, typically push
out swap spreads.

In the London interbank market, the benchmark rate on
three-month dollars (USD3MFSR=: ) rose to 0.28750 percent from
0.28438 percent on Tuesday. For details on Wednesday’s Libor
fixings, see [ID:nEAP000047]

In futures trading, the December 2012 Eurodollar contract
(EDZ2: ) dropped 17 ticks to 98.65 after hitting resistance at
98.84 on Tuesday.
(Additional reporting by Emelia Sithole-Matarise in London and
Richard Leong in New York; Editing by Andrew Hay)

MONEY MARKETS-Wider swap spreads reflect Europe concerns