Montréal Exchange explores key futures concepts for traders looking to deepen their understanding of interest rate derivatives.

In this edition, we review the tightening of Canadian 5-year swap spreads over the past year, and explore the potential drivers and future outlook for spreads. 

The article addresses typical drivers of swap spread changes including a potential minor influence from the unwinding of mortgage hedges. It also addresses risks from widening spreads considering the tendency for U.S. swap spreads to trade consistently tighter than Canadian spreads. 

Finally, a strategy for managers to profit from potential swap spread widening is outlined, referring to the purchase of Five-Year Government of Canada Bond Futures (CGFU25 in this case) against an interest swap to achieve rate neutrality.