Swap spread
The swap rate minus the government bond yield of the same maturity. It reflects credit and liquidity conditions and the supply of government bonds, and can even be negative.
Where you will meet it
Swap spread appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Set out where information about risk can be found
“Regulatory filings, proxy statements and the financial press add more, and market data such as credit default swap spreads and equity volatility reflect how investors price risk.”
- Work out the swap spread at a given maturity and explain what it means
“The swap spread for a maturity is the swap rate minus the government bond yield of the same maturity.”
- Discuss relative value hedge fund strategies: their investment features, how they are put into practice and the role they play in a portfolio
“Fixed-income arbitrage exploits anomalies such as yield curve kinks, on-the-run versus off-the-run bonds, swap spreads or carry trades; leverage can be very high and positions suffer when liquidity dries up.”
- Weigh the strengths and weaknesses of the different spread measures used in credit portfolios, and show why the option-adjusted spread is the measure of choice
“The asset swap spread and the CDS basis compare the bond with the floating-rate and CDS markets.”
See also
Practise it
Practise swap spread until it is automatic: questions that explain every wrong option.
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