A closer look at swap / Invoice spread opportunities

Some important changes have occurred in recent years that may alter the dynamics of swap spreads in Canada. First, the rise in interest rates since 2021 results in a different "normal" level of spreads. Second, swap spread trades have become simpler and easier than ever before thanks to changes in standard Canadian swap terms. Third, the rise of liquid futures contracts may influence spreads going forward. Finally, there is reason to not trust the mortgage seasonal in 2024, but that may lead to trading opportunities later in the year. We visit each hypothesis in turn after a brief update on the price action for spreads in recent years.

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    September futures contracts face first notice August 29 and first delivery September 2, following the Labour Day holiday. The holiday timing prompts early roll trades as managers and dealers attempt to close September contracts ahead of schedule, creating optimal liquid roll dates between August 25 - 27. The holiday period typically creates more volatile roll pricing as market participation shifts. Additionally, futures have been trading rich to bonds since July, further complicating execution. Timing options will be active for CGZ and CGF contracts this quarter.
    August 13, 2025
    After a 43-basis-point tightening over 13 months, Canadian 5-year swap spreads are showing signs of stabilizing, opening up new opportunities in fixed-income markets. This tightening reflects changes in risk appetite, government bond issuance, and mortgage market hedging practices. While economic uncertainties persist, current spread levels suggest a potential for mean reversion, particularly when compared to historical trends. This market development provides tactical entry points for relative value strategies.