1
$\begingroup$

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?

Improve this question
$\endgroup$
0

1 Answer 1

Reset to default
3
$\begingroup$

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.

Improve this answer
$\endgroup$
3
  • $\begingroup$ 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
  • 1
    $\begingroup$ 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

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.