Why do swap spreads go negative?

Negative swap spreads (10-year swap rate below 10-year Treasury yield) occur when supply/demand imbalances dominate credit considerations. Heavy corporate bond issuance causes pay-fixed hedging pressure, pushing swap rates down relative to Treasuries. The 2015–2016 negative 30-year US swap spread episode illustrated this.

What drives swap spread widening during stress?

During credit stress, swap spreads widen because LIBOR/SOFR rates rise relative to risk-free Treasury rates, reflecting counterparty credit risk and funding stress. The 2008 widening of LIBOR-OIS spread above 300 bps illustrated extreme financial system stress.

Swap Spread vs Treasury

Calculate the interest rate swap spread as the difference between the fixed swap rate and the same-maturity Treasury yield, reflecting interbank credit risk and demand/supply dynamics in rates markets.

40.0 bpsswap spread

The swap rate is 40.0 bps above the 3.85% government bond yield — a positive swap spread, typically reflecting credit and liquidity risk in the swap market.

Swap spread: Swap spread = swap rate − government bond yield of the same maturity, quoted in basis points (1 bp = 0.01%). A positive spread compensates for credit and liquidity risk relative to risk-free government debt. Results are illustrative and not investment advice.

How to Use

Enter the values for the scenario you are assessing. Calculate the interest rate swap spread as the difference between the fixed swap rate and the same-maturity Treasury yield, reflecting interbank credit risk and demand/supply dynamics in rates markets. Use the swap spread result to inform your calculation.

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