Am reading a book (The Complete Practitioner's Guide to the Bond Market by Steven Dym, 2009) where the author gives an example of someone buying a 5 year par 4.65% treasury and someone else entering an 5 year interest rate swap agreeing to receive 5.75%. The treasury yield moves down .15% to 4.5% The swap spread on the IRS stays the same so they enter an offsetting swap at 5.6%, and therefore locking in .15% for five years. The part I'm trying to understand is this:
(referring to the IRS)..is it really the same as transacting with the actual bond? In terms of profit, essentially yes. Recall from Chapter 12 that the degree of price change in a bond brought about by a change in yield depends on its maturity, modified somewhat by the size of the coupon. This is quantified by the bond's dv01 (duration). Had the trader purchased the five-year Treasury when it yielded 4.65% and sold soon thereafter when it yielded 4.5% her profit would have reflected the effect of the 15 basis point drop -- 15 times the bond's dv01. You know what? The trader with the pair of swaps in our example is now entitled to 15 basis points, net, each year multiplied by the face amount. And the present value of that is the same as the profit on the Treasury note! The five-year swap has the same dv01 (duration) as a par five-year bond.
I get that the Treasury buyer's profit is 15 x the dv01. I don't get how the 15 bp locked in through the swap is supposed to equal that same number. Does someone have the calculation on how one equals the other?
I like to believe it because it basically says you should just enter a swap rather than buy a Treasury, it's so much better. But I don't understand it enough and almost sounds too good to be true. Like why would anyone buy Treasuries?