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When I read up on swap spreads, the definition always goes something like this: The swap spread is the difference between the fixed leg of swap and a Treasury bond with the same maturity.

So if the fixed leg of a 10y swap is 8% and the Treasury bond has a rate of 5%, the spread is 3%. What confuses me about this is that I thought the fixed rate of the swap depends on the floating leg: If a company has a variable interest rate of Libor + 2%, they will probably get a different fixed rate in a swap compared to a company with Libor + 1%. And that would lead to a different swap spread.

Could someone point out where my mistake is?

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Yes that’s pretty simple : for the purposes of defining the swap spread, we assume that the libor leg of the swap is at libor flat.

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  • $\begingroup$ Sorry, not sure I understand what "being at LIBOR flat" means for a swap. Do you mean that it is assumed that the floating leg rate is just the LIBOR, hence the swap spread is just: IRS fixed rate - Treasury Bond rate (i.e. 3% in the example above)? $\endgroup$
    – JejeBelfort
    Jun 3, 2019 at 2:15
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    $\begingroup$ Yes , correct. Just fyi , swap spreads have never been anywhere near 3% in the US. Right now the 10yr swap spread is close to zero. $\endgroup$
    – dm63
    Jun 3, 2019 at 2:44
  • $\begingroup$ (1) "Libor flat" is another way of saying Libor+0%, (2) You are probably reading a book about swaps from the 1980's if it uses examples with 8% and 5% $\endgroup$
    – Alex C
    Jun 3, 2019 at 3:51

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