Cross-Currency Basis Swaps and Bond Spread Comparisons

Summary

The document asks why a GBP bond’s spread over gilts differs from the spread implied when converting its funding into USD through a cross-currency swap. It gives an example involving a seven-year bullet bond, a Bloomberg-derived USD equivalent, and the contemporaneous USD/GBP basis, then asks what accounts for the remaining spread gap.

The answer explains that cross-currency swaps are LIBOR-based instruments and points to the difference between the two currencies’ seven-year swap spreads. A swap spread is described as the difference between a government bond yield and LIBOR in that currency. This provides a conceptual bridge between bond spreads over gilts or Treasuries and swap-based funding. The exchange is brief and does not derive the conversion, quantify each contribution to the example, or discuss conventions and market conditions, so it is an explanation of the source of the discrepancy rather than a complete pricing procedure.

Key ideas

• A cross-currency swap can make a foreign-currency bond’s funding comparable in another currency.
• The bond spread over a government benchmark may not match the converted spread in the other currency.
• Cross-currency swaps are described as LIBOR instruments.
• Differences in the currencies’ swap spreads help explain the discrepancy.
• A swap spread is the difference between a government yield and LIBOR in that currency.

Tags

# Cross currency basis swap for bonds


# Cross currency basis swap for bonds












Running a cross currency swap on a GBP issued 2.75% 7yr bond (i.e a bullet), with funding in USD so need to determine the equivalent in USD.

The GBP bond trades at circa 180bps over the Gilt.

Using bloomberg XCF function the USD equivalent is 3.8% implying a spread of 160 + Treasury. A difference of 20bps. The current (bloomberg as BPBS7) USD/GBP basis swap is 6.25bps.

What explains the other 13.75 basis points difference between the 2 spreads over their respective Gilt/Treasury?

## Answer by Attack68 (score 1)

https://quant.stackexchange.com/a/45669

Cross currency swaps (XCSs) are LIBOR instruments.

The difference is the difference in 7y swapspreads in the two currencies.

A swapspread is the difference between the treasury yield and LIBOR in each currency.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.