I recently had an interview where I was asked what to use as risk-free rate. In all my textbooks it was always the US treasury yield curve.

But they said no its now the "swap curve".

Why is the swap curve now used as riskfree rate instead of government bonds? This includes to explain the difference between swapcurve and yieldcurve.


2 Answers 2


I guess it depends on what they're referring to... The traditional swap curve (LIBOR-based) is certainly not risk free, as evidenced by the experience of the financial crisis and the resulting migration to OIS discounting. The OIS curve (which is a kind of swap curve...) is now the standard risk-free curve.

The Treasury yield curve is not favored, because everyone builds their own smoothed Treasury curves. Depending not the smoothing techniques, the resulting Treasury curves can be pretty different. By contrast, although the curve building methodologies for swap curve can vary, the resulting curves tend to be much more similar.

The Treasury market is also much more technical; e.g., an issue trading special in the repo market can be very expensive, the CTD of a futures can trade rich if the shorts have difficulty finding the issue to make delivery, etc.

  • $\begingroup$ Can you explain what an OIS curve represents? $\endgroup$
    – emcor
    Jun 10, 2015 at 19:21
  • 2
    $\begingroup$ Overnight indexed swaps; they're swaps whose floating leg is indexed against an overnight index (e.g., Fed funds effective for USD). $\endgroup$
    – Helin
    Jun 10, 2015 at 19:38
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    $\begingroup$ Nice answer, additional comment to OP: The answer of the interviewer is actually imprecise and I would expect from the interviewer to state that the OIS curve is used. There are a gazillion "swap curves" out there. Obviously for your next interviews if such question comes up again you can also ask back what the interviewer means with "swap curve". 2 things can happen: a) Interviewer appreciates your curiosity and (rightly) deems asking for more details important, b) he/she feels challenged in which case you might consider whether you want to work for someone who takes issue with curiosity. $\endgroup$
    – Matt Wolf
    Jun 11, 2015 at 3:57

Nobody is saying that swaps are "riskless". The question is whether the "appropriate" interest rates should be "riskless" in the first place.

The assumption they should is a convention borne of decades of academic papers and economic textbooks. For any academic, investors are always sitting on a dollar of cash and working out how much to allocate to a risky asset versus a T-Bill. Except even they will probably accept that in reality that the cash probably sits in a bank CD or Apple commercial paper etc. if not put work into riskier (as opposed to risky) assets.

The case for using swaps is about an appropriate baseline, against which to take stock risk. If I buy an S&P future, my return is an excess return relative to my cost of carry, which is a function of private-sector interest rates not public sector ones. Stock + Dividend = Cash + Future.

This might be equal to Bond Yield + Carry&Roll + TED spread... but why should the TED spread or 1Y5Y rolldown make the S&P any more or less attractive? Plus if Uncle Sam can finance his balance sheet more cheaply than you or I, then what good is that to us? We should compare stocks to the funding costs at which market participants are funding their balance sheets. These are the interbank rates baked into futures pricing.

If we wanted to think about equities 1 or 5 years out, then the swap rate is the carry cost of the Cash above. It's the genuine opportunity cost/benefit of not taking equity risk. Academics are academics; and market participants are market participants. The two groups just use slightly different conventions here.


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