It happened to me (again!) yesterday. The curve spreads are naughty naught critters!

Let’s explain:

In some cases, the curve spread indicator (the small 1 or 2 on the left of the market quote) is sometimes bugged and does not work properly. Usually nothing to worry about as it is quite easy to see if there are spreads or not (just need to play with the combo box on the far right).

Unfortunately when you’re working on a new environment or with rates which source is not clear to you, they’re not always your first target.

So what happened? (I know this story is more thrilling than a Stephen King book (yep, just compared myself to Stephen King just like that))

Basically a curve was not calibrating and I followed my previous post steps to understand what was going on. Removing curve spreads, reducing the number of instruments (the quotes were ok). Finally it was calibrating to a crazy rate (-50%). Could not understand why, market quote was correct. Tried to overtype the zero rate and got a crazy market quote.

As the instrument had the market quote as a margin on the secondary I was suspecting that something was amiss there. The pricing maybe was reading incorrectly the margin. Started to look at other curves to see if the problem was there as well, but everything was ok.

So went back to my curve and somehow (imagine a spot light above my head) started to check my curve spreads! Et voila, eureka moment, there were convexity spreads (in the range of -50%). Zeroing them brought everything back inline, the curve calibrated ok, problem solved.

As usual with these kinds of problems, even if you’re proud to have solve the issue, you always feel bad not to have checked the guilty part first!

What about you dear reader? Any similar experience?