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Updated October 7, 2020

What is a Swap Spread?

A swap spread is the difference between the fixed rate component of a given swap and the yield on a Treasury item or other fixed-income investment with a similar maturity.

How Does a Swap Spread Work?

Companies engage in swaps in order to benefit from an exchange of comparative interest rate advantage. The terms of a plain vanilla (i.e. straightforward) swap are highly variable from contract to contract based on the needs of and resources available to the participating counterparties. A Treasury bond is often used as a benchmark because its rate is considered risk-free. The swap spread on a given contract indicates the associated level of risk. Risk increases as the spread widens. For instance, if one 10-year swap, XYZ, has a fixed rate of seven percent and a 10-year Treasury bond with the same maturity date has a fixed rate of five percent, the swap spread would be two percent (200 basis points) (7% - 5% = 2%).

Why Does a Swap Spread Matter?

As a reflection of risk, swap spreads are often used to assess the creditworthiness of participating parties.

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Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers.

If you have a question about Swap Spread, then please ask Paul.

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