What are swap spread?

<p>A swap spread is the difference between the fixed component of a given swap and the yield on a government security, usually from the U.S. Treasury, with the same maturity. Swaps are derivative contracts to exchange fixed interest payments for floating rate payments. Since a Treasury bond (T-bond) is often used as a benchmark and its rate is considered risk-free, the swap spread on a given contract is determined by the perceived risk of the parties engaging in the swap. As perceived risk increases, so does the swap spread. For this reason, swap spreads can be used to assess the parties' creditworthiness.</p>

<p id="isPasted">A swap spread is the difference between the fixed rate of an interest rate swap and the yield on a government bond of the same maturity. It acts as an indicator of credit risk and market liquidity, with a wider spread suggesting higher credit or liquidity risk. For example, if a 10-year swap rate is 4% and the 10-year Treasury yield is 3.5%, the swap spread is 0.50% or 50 basis points.&nbsp;</p><p><strong>It measures:</strong></p><ul><li><strong>Creditworthiness</strong>: It reflects the perceived creditworthiness of the counterparties to the swap contract.</li><li><strong>Market Liquidity</strong>: It can indicate the liquidity of the market, as swaps are often seen as a more liquid or credit-sensitive instrument than government bonds.</li><li><strong>Risk</strong>: A high or widening swap spread indicates that investors are demanding higher compensation for risk. </li></ul>