A Primer on Trading SIFMA Swaps

Abstract

SIFMA/LIBOR ratios tend to underperform in the wake of tax reform proposals and during rallies (especially risk-off trades). Because of the relative “stickiness” of municipal yields, receive-fixed SIFMA swaps offer better risk-adjusted carry than comparable LIBOR swaps.

In recent years, the municipal cash market has become more credit focused; trading ratios versus high-grade corporate credit indexes (e.g., CDX.IG) presents relative value opportunities with good risk–reward characteristics. SFIMA swaps are better suited to hedging municipal cash bonds because of their lower tracking error compared to taxable market products such as LIBOR swaps. Additionally, trading municipal cash bonds against SIFMA swaps offers a good risk–reward dynamic when bonds are trading substantially away from swaps.