Where should swap spreads be?

- Swap spreads: "We review several structural factors that should impact swap spreads in the coming years, and look at fair value in 10yr, 5yr, and 2yr spreads. The steep inversion in
the spread curve is currently between the 5-year and 10-year point—we think that inversion should be concentrated in the 2-year to 5-year segment."
- Zero rates: "Chairman Bernanke highlighted lowering interest on reserves as one of the
options for stimulating the economy. We think the most likely outcome is that a lower IOR
would do very little to increase economic activity, with the other outcome being a major
structural change to US markets that could severely hurt liquidity."
- Munis: "State economic indices measuring employment and earnings have been improving
in recent months. However, this trend may stall or perhaps change course somewhat, as
stimulus funds fade, census hiring ends, and state and local governments scale back payrolls."
- Treasuries: "We believe 2s, 3s, 5s and 7s will likely be reduced by another $1b in each of the next two months but from that point onward, all nominal coupons are likely to hold steady through at least the end of the year. More aggressive cuts in shorter maturities has pushed total issuance of 5s nearly on top of issuance of 2s, helping keep the average maturity of outstanding Treasuries at a relatively high level. However, we do not expect 2-year auction sizes will ever fall below 5-year auction sizes, limiting the scope for further extension of the average maturity of the debt."
RBC US Fixed Income Weekly 20100723