Swap spreads are the difference between the swap rate (a fixed interest rate) and a corresponding government bond yield with the same maturity (Treasury securities in the case of the United States).
For example, if the current market rate for a five-year swap is 1.35 percent and the current yield on the five-year Treasury note is 1.33 percent, the five-year swap spread would be 0.02 percentage points, or 2 basis points.
Often, fixed income prices will be quoted in "SWAPS +", wherein the swap rate is added to a given number of basis points. The swap rate there is simply the yield on an equal-maturity Treasury plus the swap spread.
Swap spread became a popular indication of credit spread in Europe during the 1990s.
References
- "The term structure and interest rate dynamics Chapter 10". CFA Institute.
- "an empirical analysis of interest rate swap spreads" (PDF). faculty.mccombs.utexas.edu. Archived from the original (PDF) on 2017-03-28.
- "Examining Swap Spreads and the Implications for Funding the Government". www.treasury.gov. Retrieved 2017-03-27.
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