How Swap Spreads Differ from Asset Swap Spreads

Summary

The document clarifies the sign convention and maturity matching used for swap spreads and asset swap spreads. A swap spread compares a swap rate with a Treasury yield; it is treated as negative when the Treasury yield is above the swap rate. An asset swap spread instead describes the break-even spread over the reference floating rate needed to match a bond’s cash flows, so its sign convention runs in the opposite direction.

The answer also distinguishes the instruments used in the comparisons. A quoted swap spread typically uses a swap at an exact tenor and the most recently issued Treasury, whose remaining maturity may differ slightly from that tenor. An asset swap spread assumes the bond and swap have matching maturities. These conventions explain why the measures can have opposite signs and may not be directly comparable. The brief discussion does not detail asset-swap valuation mechanics, conventions across markets, or adjustments for credit, funding, or collateral.

Key ideas

• A swap spread compares a swap rate with a Treasury yield.
• A swap spread is negative when the Treasury yield exceeds the swap rate.
• Asset swap spreads use an opposite sign convention to swap spreads.
• Swap spreads may compare an exact-tenor swap with a Treasury of slightly different maturity.
• Asset swap spreads assume matching bond and swap maturities.

Tags

# what is the difference between swap spread and asset swap spread


# what is the difference between swap spread and asset swap spread












apparently and confusingly, swap spread is defined as the difference between the swap rate and its matched maturity treasury yield as per https://www.newyorkfed.org/medialibrary/media/research/epr/2018/epr_2018_negative-swap-spreads_boyarchenko.pdf

and asset swap spread is defined as break even spread on top of sofr to bond coupons.

It looks to me that the sign of the two is opposite

## Answer by dm63 (score 4, accepted)

https://quant.stackexchange.com/a/81635

You are right, they are opposite sign. Swap spreads are considered negative if bond yield exceeds swap rate. This is because when they began life in the 1980s, they were positive. Asset swap spreads are the other way around. Note that there are other some slight differences, namely : the swap spread is the difference between the exact maturity swap (eg 10yr) and the most recently issued Treasury ( which might currently be 9yr 11mo). By comparison, asset swap spreads are assumed to have the exact same maturity between swap and bond.

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