Interpreting Asset-Swap Spreads and Futures Invoice Spreads

# Two practitioner questions about asset swap spreads


# Two practitioner questions about asset swap spreads












I have two questions regarding the terminology used on the practitioner side regarding asset swap spreads. Asset swaps are mainly used to retain the credit exposure of a bond while minimizing the interest rate risk on it. Thus, the asset swap spread depends crucially on the bond involved and its credit risk.

Question 1 I often read by research desk that ASW-spread have widened or tighten without concrete reference to the bond. As said above, the asset swap spread depends on the credit quality of the swapped bond. So is there a market standard for this? If people talk about USD, do they mean swapped Treasuries, in EUR swapped bunds?

I do understand the asset swap with the underlying cash instrument. But I also often read it in connection with futures.

Question 2 Is there something like an asset swap on futures where the bond involved is the cheapest-to-deliver? What is meant if people talk about Schatz/Bund ASW-Box for example?

## Answer by user42108 (score 4, accepted)

https://quant.stackexchange.com/a/62026

Question 1 I often read by research desk that ASW-spread have widened or tighten without concrete reference to the bond. As said above, the asset swap spread depends on the credit quality of the swapped bond. So is there a market standard for this? If people talk about USD, do they mean swapped Treasuries, in EUR swapped bunds?

Which research papers, credit or rates? In rates, swap spreads means spread between swaps and govys. I don't know what it would mean in the context of a corporate credit research piece.

Question 2 Is there something like an asset swap on futures where the bond involved is the cheapest-to-deliver?

Yes, referred to as futures asset swap spread or invoice spread. "OTC swap with effective date matching the delivery date of a CME bond future, and a maturity date matching that of the future’s CTD bond" per Clarus.

What is meant if people talk about Schatz/Bund ASW-Box for example?

It's a reference to a swap spread curve, in effect (i.e. difference between Bund ASW and Schatz ASW).

## Answer by Jan Stuller (score 5)

https://quant.stackexchange.com/a/63098

Let me add a couple of points.

Question 1: in my experience, ASW spread always refers to the spread between a particular Bond and the IRS of the same currency. Most commonly, this would be a spread between government bond and the corresponding IRS.

In a par-par ASW, you trade a fixed notional (say 500 million USD), whereby you swap the fixed cash-flow on the bond for a floating rate + spread, where the spread is referred to as the "Asset-Swap-Spread".

Imagine a USD bond trades at par (so the bond coupons correspond to the bond yield). If the coupons are semi-annual, then the coupon payments also exactly correspond (timing-wise) to the fixed coupon frequency of a USD IRS (which trades as quarterly float vs. semiannual fixed).

If the bond coupons are greater than the fixed rate on the IRS, then the ASW spread is positive. If they are smaller, the ASW spread is negative. Whenever the ASW spread gets less positive (or more negative, if it's already negative), this is referred to as "Asset Swap Spread tightening". Whenever the ASW spread gets more positive (or less negative, if it's already negative), this is referred to as Asset Swap Spread widening.

(If the bond doesn't trade at par, it works the same way, you essentially swap the bond yield for the fixed IRS rate + spread).

Credit vs. ASW spread: in my experience, government bonds, even emerging market bonds, mainly trade as an IRS instrument, not a credit instrument. For example, all European govies have some "credit spread" on the German Bunds, but (except for Greek bonds, which used to be driven by credit), all of these European govies trade as an interest rate instrument linked to the corresponding central bank policy rate (and other factors, such as demand by funds & local insurance companies, etc). To my knowledge, very few people (if anyone at all) trades credit in European govies (for example, taking EM markets as an example again: the Polish or Czech credit default swaps are pretty illiquid, and the credit component of the bond can thus not be traded in a meaningful way).

On corporate bonds, or Latam EM govies where I believe the credit component might be more pronounced, what can be traded is the CDS-Bond Basis spread: i.e. the spread between the credit component of the bond yield and the corresponding CDS. This sread can again widen or tighten, but when we talk about ASW spread, we always refer to the spread between bonds and IRS.

## Answer by Dimitri Vulis (score 4)

https://quant.stackexchange.com/a/63104

I feel that it depends on who's writing the research, and on their personal idiosyncratic preferences.

For example, picking a random credit research piece, we see

> Asset-swap spreads in the secondary market widened modestly by 1.3bp

and another random piece from the same team:

> Asset-swap spreads widened significantly at the beginning of March across different covered bond markets

But another shop writes:

> We think that EEMEA credit spreads will likely remain range bound in the near term as overall directionality in credit spreads remains hard to come by. We therefore focus on relative value trades.

And another shop writes:

> Z-spreads tightened for 65% of bonds in the BEV universe in July, with z-spreads for high-yield bonds tightening by an average of 71 basis points. In contrast, z-spreads for investment grade bonds tightened by an average of 26 basis points.

And another shop simply writes:

> Spreads for short-dated prime auto loan and credit card ABS tightened another 90–100 basis points

Other similar credit research talks about credit spreads, spreads in general (without explicitly saying which spreads), Z-spreads, OAS, spreads to treasury bencmarks, it's all the same information. I don't see what ASW movement conveying any information that others don't.

Edit: a few weeks after I wrote the above, I wanted to add two observations.

1 Suppose you have a corporate bond issuer, and some bonds are denominated in hard currency (USD or EUR) with low risk-free interest rate, and some more bonds are denominated in local currencies with higher interest rates, like BRL. It's perfectly fine to compare the Z-spreads of USD and EUR bonds, but Z-spread over the DI curve (Brazil's version of kind-of swap curve) is like comparing apples and oranges. However, comparing the bonds' cross-currency asset swap spreads when swapping everything into USD or EUR gives a clearer picture than Z-spreads.

2 When people trade bond options, most of the time the strike is the bond's the clean price. But you can do anything OTC, and when people do want the strike to be some spread, they often choose asset swap spread.

## Answer by DataAdventurer (score 1)

https://quant.stackexchange.com/a/63096

I guess by "research desk" you mean a division at e.g. an investment bank and not academic research. To give others an impression of the credit market, practioners do not speak about one individual bond spread, they speak more generally about spreadS, meaning e.g. the EUR IG corporate bond market as a whole.

The (credit) spread is a risk compensation for default risk (among a lot of other risks). US Gov and Germany Gov Bonds are seen as risk free. ASW Spreads are for risk bearing fixed income securites such as corporate bonds.

ASWs are usually used to generate equal payments of the credit spread component of risky bonds.

Further reading: Bloomberg FICM < GO > shows you credit spread changes. Whereas the function YAS < GO > shows you the Credit spreads calculations.