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Swap Spread

The swap spread is the difference between the fixed interest rate of a swap (the swap rate) and the yield on a comparable government bond, typically U.S. Treasury bonds. The swap spread reflects the credit risk of the parties involved in the swap and the relative demand for swaps versus government securities. A widening swap spread indicates higher perceived credit risk or increased demand for fixed-rate payments.

Example

If the fixed rate on a 5-year interest rate swap is 3% and the yield on a 5-year U.S. Treasury bond is 2%, the swap spread is 1%.

Key points

• The difference between the swap rate and the yield on a government bond.

• Reflects credit risk and market demand for swaps versus government securities.

• A wider spread indicates higher credit risk or demand for swaps.

Quick Answers to Curious Questions

A wider swap spread indicates higher credit risk for the parties involved in the swap compared to the government bond market.

The relative attractiveness of swaps versus government bonds, influencing the cost of entering into a swap agreement.

Swap spreads widen when credit risk increases or demand for swaps rises, and they narrow when credit risk decreases or demand for swaps falls.

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