Why Treasury Yields Can Exceed OIS Rates

Summary

The document identifies the difference between a Treasury yield and an OIS swap rate as a swap spread. It addresses why a Treasury yield can sit above the corresponding OIS rate, despite Treasuries being backed by the US government and OIS being based on an unsecured overnight rate. The answer points to the large increase in Treasury issuance after the financial crisis as a supply factor associated with swap spreads turning negative.

It also cautions against treating the two rates as equivalent credit-risk measures. Although the overnight rate is unsecured, it carries little credit exposure over its short accrual period. A longer-dated OIS swap does not represent a single investment bearing unsecured credit risk for its full tenor, so comparing its rate directly with a Treasury bond yield does not isolate credit risk. The explanation is concise and gives no detailed decomposition of the spread, so it should be read as a high-level account rather than a complete pricing model.

Key ideas

• The Treasury yield minus the comparable OIS rate is referred to as a swap spread.
• Treasury supply is presented as a major factor behind negative US swap spreads after the financial crisis.
• An unsecured overnight reference rate can contain little credit risk because of its short accrual period.
• A long-tenor OIS swap and a Treasury bond are not directly equivalent measures of long-term credit exposure.
• The explanation offers a broad supply-based account without decomposing all drivers of swap spreads.

Tags

# US Treasury vs OIS rate


# US Treasury vs OIS rate












Is there any specific name for the spread between US Treasury vs OIS rate?

I observed that for a specific tenor (e.g. 10 years) US Treasury is higher than the OIS curve. Any reason for this? OIS is unsecured so should not OIS be higher than Treasury rate which is backed by US Govt hence less credit risk?

## Answer by dm63 (score 3, accepted)

https://quant.stackexchange.com/a/74118

You raise a few separate questions. To directly answer the first question, this is called the ‘swap spread’. So for example the 10 year swap spread is currently around -30bp. (Treasury yield is 3.50 and the ois swap rate is about 3.20). If you look historically, you will see that these swap spreads were positive up until 2009, and negative thereafter. The reason for this is that the US Treasury dramatically increased the issuance of Treasuries after the financial crisis, so this is mostly a matter of increased supply. Your question about credit risk isn’t relevant here. Even though ois (Fed funds ) is an unsecured rate , it is an overnight rate so contains almost no credit risk. Note that a ten year ois swap does not contain 10 years’ of credit risk, so it is not apples to apples with a 10 year investment such as a Treasury 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.