OIS Swap Curves, Treasury Curves, and Risk-Free Benchmarks
Summary
The discussion distinguishes the traditional LIBOR-based swap curve from the overnight indexed swap (OIS) curve. The accepted answer says the LIBOR-based curve is not risk-free, citing the financial crisis and the subsequent shift toward OIS discounting. OIS is described as the current standard risk-free curve in this context, though the document stresses that the appropriate benchmark depends on what is being measured.
Reasons offered for preferring swap-based curves over Treasury curves include greater consistency across curve-building methods and Treasury-market distortions. Treasury issues can trade unusually rich or expensive because of repo specialness or delivery dynamics in futures. A second answer frames the choice as one of economic relevance: swap rates may better reflect private-sector funding costs and the carry embedded in equity futures, while Treasury yields reflect government financing conditions. These are market conventions and use-case arguments, not a claim that swaps are literally riskless. The discussion does not give a formal curve-construction procedure or cover later benchmark reforms.
Key ideas
- LIBOR-based swap rates include credit risk, while OIS curves became standard for risk-free discounting in the setting discussed.
- Treasury curves can differ based on smoothing choices and may reflect security-specific technical effects.
- Repo specialness and futures delivery constraints can distort individual Treasury prices.
- Swap rates may be a more relevant funding benchmark for evaluating equity futures carry.
- The suitable reference curve depends on the valuation or comparison being performed.
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Full text
# Why using the swap curve as riskfree rate and no longer gov bonds? # Why using the swap curve as riskfree rate and no longer gov bonds? I recently had an interview where I was asked what to use as risk-free rate. In all my textbooks it was always the US treasury yield curve. But they said no its now the "swap curve". Why is the swap curve now used as riskfree rate instead of government bonds? This includes to explain the difference between swapcurve and yieldcurve. ## Answer by Helin (score 17, accepted) https://quant.stackexchange.com/a/18278 I guess it depends on what they're referring to... The traditional swap curve (LIBOR-based) is certainly not risk free, as evidenced by the experience of the financial crisis and the resulting migration to OIS discounting. The OIS curve (which is a kind of swap curve...) is now the standard risk-free curve. The Treasury yield curve is not favored, because everyone builds their own smoothed Treasury curves. Depending not the smoothing techniques, the resulting Treasury curves can be pretty different. By contrast, although the curve building methodologies for swap curve can vary, the resulting curves tend to be much more similar. The Treasury market is also much more technical; e.g., an issue trading special in the repo market can be very expensive, the CTD of a futures can trade rich if the shorts have difficulty finding the issue to make delivery, etc. ## Answer by demully (score 0) https://quant.stackexchange.com/a/47038 Nobody is saying that swaps are "riskless". The question is whether the "appropriate" interest rates should be "riskless" in the first place. The assumption they should is a convention borne of decades of academic papers and economic textbooks. For any academic, investors are always sitting on a dollar of cash and working out how much to allocate to a risky asset versus a T-Bill. Except even they will probably accept that in reality that the cash probably sits in a bank CD or Apple commercial paper etc. if not put work into riskier (as opposed to risky) assets. The case for using swaps is about an appropriate baseline, against which to take stock risk. If I buy an S&P future, my return is an excess return relative to my cost of carry, which is a function of private-sector interest rates not public sector ones. Stock + Dividend = Cash + Future. This might be equal to Bond Yield + Carry&Roll + TED spread... but why should the TED spread or 1Y5Y rolldown make the S&P any more or less attractive? Plus if Uncle Sam can finance his balance sheet more cheaply than you or I, then what good is that to us? We should compare stocks to the funding costs at which market participants are funding their balance sheets. These are the interbank rates baked into futures pricing. If we wanted to think about equities 1 or 5 years out, then the swap rate is the carry cost of the Cash above. It's the genuine opportunity cost/benefit of not taking equity risk. Academics are academics; and market participants are market participants. The two groups just use slightly different conventions here.
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