CHICAGO, July 6: US dollar interest-rate swap spreads widened a bit in slow trade on Friday, as a robust stock market rally pulled investors away from safe-haven US Treasuries and similar instruments like swaps.

Yields on benchmark 10-year notes rose to nearly two-week highs, prompting some mortgage players to pay fixed rates in swaps — a position that causes spreads to widen — to remove hedges put in place when the they had feared a major rally.

As Treasury yields and swap rates fell in recent weeks to their lowest levels in eight months, many mortgage players had worried about a big rise in refinancing activity that would force them to reinvest their cash in Treasuries or swaps. But that demand never materialized, as the fixed-income market has reversed course.

Meanwhile, the stock market’s severe beating in the past three months has made it extremely difficult for companies to issue new debt and has removed one of the positive factors helping spreads contract. No investment grade corporate deals were priced this week, which was shortened for the U.S. Independence Day holiday.

Companies issuing longer-dated debt and then using the swaps market to switch their debt payments back to cheaper, short-term floating rates has powered a rally in swap spreads throughout the year.

In very thin trade, stocks soared on Friday, with the Dow Jones industrial average climbing about 3.6 per cent to end around 9,379.50, its biggest percentage gain in more than nine months.

The Standard & Poor’s 500 index gained about 3.7 per cent and the Nasdaq Composite index added nearly 5 per cent.

Closely watched 10-year swap spreads widened to about 54-3/2, out only slightly from 54-1/2 on Wednesday.—Reuters