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Since interest rate swaps became common in the 1980s, the conventional wisdom has been that the interest rate swap spread over Treasuries has been a good proxy for bank funding costs.  This assumption was and still is widely used, especially by banks who are not regular issuers of bonds and long term certificates of deposit.  If this conventional wisdom is true, why has the 30 year interest rate swap spread to Treasuries been negative on 801 days since the spread first turned negative on October 24, 2008?  This blog explains.

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Today’s forecast for U.S. Treasury yields is based on the February 2, 2012 constant maturity Treasury yields that were reported by the Board of Governors of the Federal Reserve System in its H15 Statistical Release at 4:15 p.m. Eastern Standard Time February 3, 2012. The “forecast” is the implied future coupon bearing U.S. Treasury yields derived using the maximum smoothness forward rate smoothing approach developed by Adams and van Deventer (Journal of Fixed Income, 1994) and corrected in van Deventer and Imai, Financial Risk Analytics (1996). For an electronic delivery of this interest rate data in Kamakura Risk Manager table format, please subscribe via info@kamakuraco.com.

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On March 9, 2009, my partner Prof. Robert Jarrow and I wrote a blog entitled “The Rating Chernobyl,” predicting that rating agency errors during the credit crisis were so serious that even their own self assessments would show once and for all that legacy ratings are a hopelessly flawed measure of default risk.  That 2009 prediction hasn’t come true for a very simple reason: the rating agencies have left their mistakes out of their self-assessments. This blog shows the dangers of relying on rating agency default rates in credit risk management, because the numbers are simply not credible.

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Today’s forecast for U.S. Treasury yields is based on the January 26, 2012 constant maturity Treasury yields that were reported by the Board of Governors of the Federal Reserve System in its H15 Statistical Release at 4:15 p.m. Eastern Standard Time January 27, 2012. The “forecast” is the implied future coupon bearing U.S. Treasury yields derived using the maximum smoothness forward rate smoothing approach developed by Adams and van Deventer (Journal of Fixed Income, 1994) and corrected in van Deventer and Imai, Financial Risk Analytics (1996). For an electronic delivery of this interest rate data in Kamakura Risk Manager table format, please subscribe via info@kamakuraco.com.

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A recent blog on Reuters named three prominent American corporations in the post “Links to CDS measures growing common in bank credit deals.”  This blog argues that borrowers should never agree to tie borrowing rates to credit default swaps in a loan agreement.  It’s the 21st century equivalent of telling your banker “I’ll pay whatever rate you think is fair.” This blog explains why.

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