How Tenor Basis Swap Spreads Reflect Rate Tenors

Summary

The document explains why a tenor basis swap spread may be negative when comparing a shorter rate tenor with a three-month reference, and positive when comparing a longer tenor. One explanation frames the spread as an adjustment to the three-month leg: shorter tenors receive a negative adjustment, while longer tenors receive a positive one. Another explains the signs through the relative pricing of borrowing periods: a three-month loan is typically priced above a sequence of one-month loans, while a six-month loan is typically priced above two consecutive three-month loans.

The examples describe market quotes and common intuition for the sign of the spread, rather than a forecasting rule. The discussion does not establish that the sign must always have these values; actual basis levels depend on market pricing and conditions. It offers no data analysis or method for predicting when a spread will change sign.

Key ideas

• Tenor basis swap spreads are quoted as adjustments to a reference floating-rate leg.
• A shorter tenor commonly corresponds to a negative adjustment relative to a three-month reference.
• A longer tenor commonly corresponds to a positive adjustment relative to a three-month reference.
• The sign intuition reflects differences between term borrowing rates and rates over consecutive shorter periods.
• The examples describe typical pricing relationships, not a guaranteed sign or a timing forecast.

Tags

# Tenor basis spreads 1mv3m vs 3mv6m


# Tenor basis spreads 1mv3m vs 3mv6m












I was reading this article on Tenor basis spreads(http://www.garp.org/media/1160302/052913_tenorbasisspread.pdf).

Why is the tenor basis spread for NUSD for 1mv3m negative and NUSD for 3Mv6m positive? How do u know it will be positive and when it will be negative?

## Answer by Ami44 (score 2, accepted)

https://quant.stackexchange.com/a/32807

In the presented method we have one main tenor, which is 3M in the case of USD. The Adjustment is negative if we want to adjust a tenor shorter than 3M e.g. 1M. It is positive for greater tenors like 6M or 1Y.

## Answer by dm63 (score 2)

https://quant.stackexchange.com/a/32830

I would explain it slightly differently. The data shown indicates the market price of basis swaps. The spreads shown are to be added to the 3 mo libor leg of the basis swap. For example , the 5yr basis swap price is 3m libor minus 13bp versus 1m libor , and also 3m libor plus 14bp versus 6m libor. The spread is usually negative if you are swapping to a shorter rate, and positive if you are swapping to a longer rate. That's because the rate for a 3 month loan is usually higher than a chain of 1 month loans, and the rate for a 6 month loan is usually higher than two 3 month loans made consecutively.

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