Swap Spreads Hit Record Levels, Used to Hedge MBS

Swap spreads bulged to historically wide levels last week, propelled by what dealers are calling a revolution in their market as investment banks and money managers increase their use of swaps as a hedge for credit risk.

"Swap spreads have been wider than we've seen in many years, and I suspect that they could go wider in this kind of environment," said David Montano, a director of mortgage research at Credit Suisse First Boston. "They are wider than they were in October of '98, and they will go wider, especially if there is a tightening or further inflationary information coming to the market."