Introduction

In our study we present the most important characteristics of the market of forint interest rate swaps, the factors that affect the differential between the yields of interest rate swaps and government securities (i.e. the so-called interest rate swap spread) and the most important information which can be extracted from the developments in this differential.

At the global level, the market of interest rate swaps has developed significantly in recent years. For example, the euro interest rate swap market has become more liquid than the market of euro government securities. Underlying the timeliness of our analysis is that, based both on our estimates and anecdotal information, the turnover of the forint interest rate swap market has also increased considerably in recent years, and today it may reach, or even exceed, the turnover of the government bond market. An advanced state of the interest rate swap market and the information content of swap yields are of special importance from a central bank aspect, because long-term yields and the indicators derived from them play a significant role in monetary policy decisions.

Our study focuses on identifying the factors affecting the forint interest rate swap spread. Through an analysis of the swap spread we address why the indicators (e.g. long-term yield expectations) derived from interest rate swap and treasury yields are different. The results of the estimation also contribute to a deeper analysis of the functioning of the Hungarian interest rate swap market, and in an indirect manner may even help understanding events in the government bond market. The novelty of our analysis is that no econometric analysis quantifying the factors which influence the forint interest rate swap spreads has been prepared before, and hardly any assessments of swap spreads of emerging market currencies with a state of development similar to that of the forint market can be found in the empirical literature. A further novelty involves the extension of the analysis by the joint examination of interest rate swap spreads with different maturities, which allows even better-founded conclusions to be drawn with regard to the information content of interest rate swap spreads.

Our results suggest that the effects of several factors on the developments in forint interest rate swap spreads are different from those found in empirical literature, which can be explained by the peculiarities of the domestic market compared to international markets. Overall, we came to the conclusion that in certain cases long-term yield expectations are better reflected in swap yields, while at other times they are better reflected in government bond yields. Therefore, shifts in these expectations are easier to identify by the joint use of the yield curves estimated from forint government securities and from interest rate swaps (and/or other interest rate derivatives). A further result of the study is that in the developments in swap spreads one can detect the use of all trading strategies built on interest rate swaps, which are widespread according to anecdotal information.