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us swaps-spreads drift wider, seen steady for week May 24, 2004 5:30pm ET (Reuters)

NEW YORK, May 24 (Reuters) - U.S. swap spreads pushed wider on Monday in generally lackluster trading, with market players keeping an eye on oil prices, the stock market and a batch of second-rate economic news until inflation figures Friday.

Traders said the swaps market, like most others, is keeping a close eye on oil. In New York, crude oil for July delivery jumped on Monday another $1.79 to settle at $41.72, not far below the record high of $41.85 hit last Monday. Traders doubted that Saudi Arabia's pledge to pump more oil would provide much relief.

The higher oil prices took the steam out of early gains in stocks and helped push U.S. Treasury yields slightly lower. But the minor drop in rates failed to provide relief for swap spreads, which widened a touch in what was described as a "very quiet" market by one trader.

A bevy of new bond sales from financial issuers last week helped drive spreads tighter, as a decent-sized chunk of the new debt was swapped back to short-term floating rates.

But corporate issuance seems to have slowed down sharply this holiday-shortened week. The biggest out there is a $3 billion, 10-year note offering from the Federal Home Loan Banks set to be completed Tuesday.

Some dealers have noted mortgage portfolios hedging their exposure to rates through the options market, at the same time a large mortgage servicer has gradually ratcheted up its put position in December 10-year futures. But no significant mortgage-related hedging has been spotted in the swaps market.

Intermediate spreads have basically hovered just below 50 basis points after recovering for most of the month. The five-year spread widened to 49-1/2 basis points from 49, while the 10-year spread edged out to 49-3/4 basis points from 49-1/2.

The swap curve, taking the difference between two- and 10-year swap rates, was unchanged at 236 basis points, but traders said it could see yet more flattening.

The two-year spread continued to suffer, widening to 44-1/2 basis points from 44-1/4 and up from 39-1/2 basis points a week ago. But that spread will get some relief, with the roll on the $25 billion of two-year Treasury notes to be auctioned this week running about 9 basis points.

Higher yields on new Treasury issues typically drive down spreads because swap rates are not impacted by such supply factors. Strategists say still big Treasury supply should keep a lid on the swap spread widening this year as the Federal Reserve shifts to tighten policy.

Strategists at Lehman Brothers said in a weekly note to clients that swap spreads are "unlikely to widen significantly, even in a continued sell-off." They also said the market has priced in a Fed tightening somewhat between its aggressive 1994 campaign, to the tune of 300 basis points in a calendar year, and a more "measured" tightening of 150 basis points a year.

With so many rate hikes priced in and inflation likely stable for now, the Lehman strategists said it was "difficult" to see most flattening trades being profitable.

Tuesday's data is expected to show existing home sales easing to a 6.45 million annual pace in April, just a slight decline from still strong levels.

The Conference Board's gauge of consumer confidence should be constrained by public outcry over the prisoner abuse scandal in Iraq and high gasoline prices, even as job growth has picked up. The index is seen rising just a tad, to 93.5 from 92.0, according to a median forecast of economists compiled by Reuters. ---------------------SWAP SPREADS--------------------------

May 24 May 21 May 20 May 19 May 18 May 17 2-YR 44-1/2 44-1/4 43-00 41-1/4 39-3/4 39-1/2 3-YR 45-1/4 44-3/4 44-1/4 44-1/4 43-00 43-1/4 5-YR 49-1/2 49-00 48-1/4 48-1/2 47-3/4 48-00 10-YR 49-3/4 49-1/2 49-1/2 49-3/4 48-3/4 49-00 30-YR 38-1/4 37-1/4 37-00 37-00 36-00 35-3/4 ----------------------------------------------------------- ----------------------SWAP CURVE---------------------------

May 24 May 21 May 20 May 19 May 18 May 17 2-10 226 226 227 229 230 232 2-5 140 140 139 141 141 143 5-10 86 86 88 88 89 89 ----------------------------------------------------------- (All data are based on Reuters sources and are expressed in basis points)