4. UNDERSTANDING YIELD SPREADS

Based on Fixed Income Analysis by Frank J. Fabozzi, CFA Program Curriculum, Volume 5, 2011.

1. Introduction

The interest rate offered on a particular bond issue depends on the interest rate that can be earned on 1. risk-free instruments 2. The perceived risks associated with the issue.

2. Interest Rate Determination

Focus: 1. The relationship between interest rates offered on

different bond issues at a point in time. 2. The relationships among interest rates offered in different

sectors of the economy at a given point in time. In implementing monetary policy, the Fed uses the following interest rate policy tolls: 1. Open market operations 2. The discount rate 3. Bank reserve requirements 4. Verbal persuasion to influence how bankers supply credit

to businesses and consumers.

Open Market Operations: Fed’s buying and selling of U.S. Treasury securities. Discount rate is the interest rate at which banks can borrow on a collateralized basis at the Fed’s discount window. Changing bank reserve and verbal persuasion are less frequently used.

3. U.S. Treasury Rates

The securities issued by the U.S. Department of Treasury are backed by the full faith and credit of the U.S. government. The world view these securities as being “default risk-free” securities. The Treasury issues the following securities: Treasury Bills: Zero-coupon securities with a maturity at issuance of one year or less. The Treasury currently issues 1-month, 3-month and 6-month bills.

Treasury Notes: Coupon securities with maturity at issuance greater than 1 year but not greater than 10 years. the treasury currently issues 2-year, 5-year and 10-year notes. Treasury Bonds: Coupon securities with maturity at issuance greater than 10 years. Although, Treasury bonds have traditionally been issued with maturities up to 39 years, the Treasury suspended issuance of the 30-year bonds in October 2001. Inflation-Protection Securities: Coupon securities whose principal’s reference rate is the consumer Price Index.

The on-the-run issue or current issue is the most recently auctioned issue of Treasury notes and bonds of each maturity. The off-the-run issues are securities that were previously issued and are replaced by the on-the-run issues. Issues that have been replaced by several more recent issues are said to be “well-off-the-run” issues. The secondary market for Treasury securities is an over-the-counter market where a group of U.S. government securities dealers provides continuous bids and offers on specific outstanding Treasuries. This secondary market is the most liquid financial market in the world.

Risks associated with owning U.S. Treasury securities: 1. Interest rate risk 2. Call and prepayment risk 3. Yield curve risk 4. Reinvestment risk 5. Credit risk 6. Liquidity risk 7. Exchange-rate risk 8. Volatility risk 9. Inflation or purchasing power risk 10. Event risk

3.1 Risks of Treasury Securities

All fixed income securities, including Treasury securities, expose investors to interest rate risk. However, the degree of interest rate risk is not the same for all securities. The reason is that maturity and coupon rate affect how much the price changes when interest rates change. One measure of a security’s interest rate risk is its duration. Since Treasury securities, like other fixed income securities, have different durations, they have different exposures to interest rate risk as measured by duration. Because Treasury securities are noncallable, there is no reinvestment risk due to an issue being called.

Treasury coupon securities carry reinvestment risk because, in order to realize the yield offered on the security, the investor must reinvest the coupon payments received at on interest rate equal to the computed yield. So, the Treasury coupon are exposed to reinvestment risk. Treasury bills are not exposed to reinvestment risk because they are zero-coupon instruments. The perception in the global financial community is that Treasury securities have no credit risk. Treasury securities are highly liquid. However, on-the-run and off-the-run Treasury securities trade with different degrees of liquidity. Consequently, the yields offered by on-the-run and off-the-run reflect different degrees of liquidity.

Since U.S. Treasury securities are dollar denominated, there is no exchange rate risk for an investor whose domestic currency is the U.S. dollar. However, non-U.S. investors whose domestic currency is not the U.S. dollar are exposed to exchange rate risk. Fixed rate treasury securities are exposed to inflation risk. Treasury inflation protection securities (TIPS) have a coupon rate that is effectively adjusted for the rate of inflation and therefore have protection against inflation risk. The yield on Treasury securities is impacted by a myriad of events that can be classified as political risk, a form of event risk. The action’s of monetary and fiscal policy in the United States, as well as the actions of other central banks and governments, can have an adverse or favorable impact on U.S. Treasury yields.

3.2 The Treasury Yield Curve

Exhibit 1 Relationship between Yield and Maturity for on-the-run Treasury issues on February 8, 2002 Issue (Maturity) Yield (%) 1 month 1.68 3 months 1.71 6 months 1.81 1 year 2.09 2 years 2.91 5 years 4.18 10 years 4.88 30 years 5.38

In an upward sloping yield curve , the longer the maturity, the higher the yield. This is the most typical shape for the Treasury yield curve. It is also referred to as normal yield curve. An inverted yield curve indicates that the longer the maturity, the lower the yield. In a flat yield curve, the yield is approximately the same regardless of maturity. To get a yield for maturities where no on-the-run Treasury issue exists, it is necessary to interpolate from the yield of two on-the-run issues. The simplest interpolation is the linear interpolation.

Any non-Treasury issue must offer a premium above the yield offered for the same maturity on-the-run Treasury issue. Two factors complicate the relationship between maturity and yield as portrayed by the yield curve. 1. The yield for on-the-run issues may be distorted by the

fact that purchase of these securities can be financed at lower rates, and as a result these issues offer artificially low yields.

Some investors purchase securities with borrowed funds and use the securities purchased as collateral for the loan. This type of collateralized borrowing is called a repurchase agreement. Since dealers want to obtain use of these securities for their own trading activities, they are willing to lend funds to investors at a lower interest rate than is otherwise available for borrowing in the market.

Consequently, incorporated into the price of an on-the-run Treasury security is the cheaper financing available, resulting in a lower yield for an on-the-run issue than would prevail in the absence of this financing advantage.

2. The second factor complicating the comparison of on-

the-run and off-the-run Treasury issues (in addition to liquidity differences) is that they have different interest rate risks and different reinvestment risks.

example: 5 year Coupon rate on the run (5 year) Æ 4.18% off the run (just less than 5 years) Æ 5.25%

On-the-run issue has greater interest rate risk (duration) because of the lower coupon rate. However, it has less reinvestment risk because the coupon rate is lower.

3.2.1 Theories of the Term Structure of Interest Rates

¾Pure expectations Theory (unbiased expectation theory) ¾Liquidity preference theory (liquidity premium theory) ¾Market segmentation theory

Pure Expectations Theory The pure expectations theory explains the term structure in terms of expected future short-term interest rates. According to the pure expectations theory, the market sets the yield on a two-year bond so that the return on the two-year bond is approximately equal to the return on a one-year bond plus the expected return on a one-year purchased one year from today.

Under this theory, a rising term structure indicates that the market expects short-term rates to rise in the future. A flat term structure reflects an expectation that future short-term rate will be unchanged from today’s short-term rates, while a falling term structure reflects on expectation that the future short-term rates will decline.

Shape of term structure Implication according to Pure Expectations Theory Upward sloping (normal) rates expected to rise Downward sloping (inverted) rates expected to decline Flat rates not expected to change

How does the pure expectations theory explain a humped yield curve? According to the theory, this can result when investors expect the returns on one-year securities to rise for a number of years, then fall for a number of years. The slope of the yield curve contains information regarding investors’ expectations about future inflation. Interest rates reflect the sum of a relatively stable real rate of interest plus a premium for expected inflation. If short term rates are expected to rise, investors expect inflation to rise as well. An upward (downward) sloping term structure would mean that investors expected rising (declining) future inflation.

The shortcoming of the pure expectations theory is that it assumes investors are indifferent to interest rate risk and any other risk factors associated with investing in bonds with different maturities.

Liquidity Preference Theory

The liquidity preference theory asserts that market participants want to be compensated for the interest rate associated with the holding longer-term bonds. The longer the maturity, the greater the price volatility when the interest rates change and investors want to be compensated for this risk. The term structure of interest rates is determined by 1. Expectations about future interest rates 2. A yield premium for interest rate risk Because interest rate risk increases with maturity, the

liquidity preference theory asserts that the yield premium increases with maturity.

An upward-sloping yield curve may reflect expectations that future interest rates either 1.) will rise or 2.) will be unchanged or even fall, but with a yield premium increasing with maturity fast enough to produce an upward sloping yield curve.

The theory says nothing about the expected future short-term interest rate in an upward sloping yield curve.

For flat or downward sloping yield curve, the theory is consistent with a forecast of declining future short-term interest rates, given the theory’s prediction that the yield premium for interest rate risk increases with maturity.

Because the liquidity preference theory argues that the term structure is determined by both expectations regarding future interest rate is and a yield premium for interest rate risk, it is referred to as biased expectations theory.

Market Segmentation Theory

Within the different maturity sectors of the yield curve the supply and demand for funds determine the interest rate for that sector. That is, each maturity sector is an independent or segmented market for purposes of determining the interest rate in that maturity sector. Thus, positive sloping, inverted and humped yield curves are all possible. In the bond market, investors can be divided into two groups based on their return needs: investors that manage funds versus a broad-based bond market index and those that manage funds versus their liabilities.

Investors managing funds where liabilities represent the benchmark will restrict their activities to the maturity sector that provides the best match with the maturity of their liabilities. This is the basic principle of asset-liability management. If these investors invest funds outside of the maturity sector that provides the best match against liabilities, they are exposing themselves to the risks associated with an asset-liability mismatch. Example: Consider the manager of a defined benefit pension fund. Since the liabilities of a defined pension fund are long-term, the manager will invest in the long-term maturity sector of the bond market.

Similarly, commercial banks whose liabilities are typically short-term focus on short-term fixed-income investments. Reinforcing this notion of a segmented market are restrictions imposed on financial institutions that prevent them from mismatching the maturity of assets and liabilities. A variant of the market segmentation theory is the preferred habitat theory. This theory argues that investors prefer to invest in particular maturity sectors as dedicated by the nature of their liabilities. However, proponents of this theory do not assert that investors would be unwilling to shift out of their preferred maturity sector; instead, it is argued that if investors are given an inducement to do so in the form of a yield premium, they will shift out of this preferred habitat. The implication of the theory for the shape of the yield curve is that any shape is possible.

3.3 Treasury Strips

Although the U.S. Department of the Treasury does not issue zero coupon Treasury securities with maturity greater than one year, the government dealers can synthetically create zero-coupon securities, which are effectively guaranteed by the full faith and credit of the U.S. government, with longer maturities. They create these securities by separating the coupon payments and the principal payment of a coupon-bearing Treasury security and selling them off separately. The process, referred to as stripping a Treasury security, results in securities called Treasury STRIPS.

The Treasury STRIPS created from coupon payments are called Treasury coupon STRIPS, and those created from the principal payment are called Treasury principal STRIPS. Because a zero-coupon instruments have no reinvestment risk, Treasury STRIPS for different maturities provide a superior relationship between yield and maturity than do securities on the 0n-the-run Treasury yield curve. Another advantage is that the duration of a zero-coupon security is approximately equal to its maturity. Consequently, when comparing bond issues against Treasury STRIPS, we can compare them on the basis of duration.

The yield on a zero-coupon security has a special name; the spot rate. In the case of a Treasury security, the yield is called a Treasury spot rate. The relationship between maturity and Treasury spot rates is called the term structure of interest rate.

4. Yield on Non-Treasury Securities

Despite the imperfections of the Treasury yield curve as a benchmark for the minimum interest rate that an investor requires for investing in a non-Treasury security, it is commonplace to refer to the additional yield over the benchmark. Treasury issue of the same maturity as the yield spread. In fact, because non-Treasury sectors of the fixed-income market offer a yield spread to Treasury securities, non-Treasury sectors are commonly referred to as spread sectors, and non-Treasury securities in these sectors are referred to as spread products.

4.1 Measuring Yield Spreads In general, the yield spread between any two bonds issues bond X and bond Y, is computed as follows: Yield spread = Yield on bond X – Yield on bond Y (reference band)

where bond Y is considered the reference bond (or benchmark) against which bond X is measured. When a yield spread is computed in this manner, it is referred to as an absolute yield spread and it is measured in basis points. 10 year on-the-run Treasury – 4.88% 10 year A rated Industrial bond – 6.24% Yield spread = 6.24% - 4.88% = 1.36% or 136 basis points

Yield spreads can also be measured on a relative basis by taking the ration of the yield spread to the yield of the reference bond. This is called a relative yield spread.

Sometimes bonds are compared in terms of yield ratio, the quotient of two bond yields,

Typically, in the U.S. bond market, bond Y is a Treasury issue.

Example: 10-yr A rated Æ 6.24% 10-yr Treasury Æ 4.88%

4.2 Intermarket Sector Spreads and Intramarket Spreads

Bond Sectors: U.S. government sector U.S. government agencies sector Municipal sector Corporate sector Mortgage-backed securities sector Asset-backed securities sector Foreign (sovereign, supranational, corporate) sector Different sectors are generally perceived as offering different risks and rewards.

Major market sectors are further divided into sub-sectors reflecting economic characteristics. Within the corporate sector, 1. Industrial companies 2. Utility companies 3. Finance companies 4. Banks

Asset-backed securities: Sub-sectors are based on the type of collateral backing the security. 1. Credit card loans 2. Home equity loans 3. Automobile loans 4. Manufactured housing loans 5. Student loans

The yield spread between the yields offered in 2 sectors of the bond market with the same maturity is referred to as an intermarket sector spread. The most common intermarket sector spread calculated by market participants is the yield spread between a non-Treasury sector and Treasury securities with the same maturity. The yield spread between 2 issues within a market sector is called an intramarket sector spread.

Factors that affect the intermarket and intramarket yield spreads are 1. Maturity 2. Relative credit risk of the 2 issues 3. Presence of embedded options 4. Liquidity of the 2 issues 5. Taxability of interest received by investors.

4.3 Credit Spreads

The yield spread between non-Treasury securities and Treasury securities that are identical in all respects except for credit rating is referred to as a credit spread or quality spread. Credit spreads between corporations and Treasuries change systematically with changes in the economy. Credit spreads widen (i.e., become larger) in a declining or contracting economy and narrow (i.e., become smaller) during economic expansion.

The economic rationale is that, in a declining or contracting economy, corporation experience declines in revenue and cash flow, making it more difficult for corporate issuers to service their contractual debt obligations. To induce investors to hold spread products as credit quality deteriorates, the credit spread widens. The widening occurs as investors sell off corporates and invest the proceeds in Treasury securities (popularly referred to as “flight to quality”). The converse is that, during economic expression and brisk economic activity, revenue and cash flow increase, increasing the likelihood that corporate issuers will have the capacity to service their contractual debt obligations.

Some market observers use the yield spread between issues in cyclical and non-cyclical industry sectors as a proxy for yield spreads due to expected economic conditions. The rationale is as follows. While companies in both cyclical and non-cyclical industries are adversely affected by expectations of a recession, the impact is greater for cyclical industries. As a result, the yield spread between issuers in cyclical and non-cyclical industry sectors will widen with expectations of a contracting economy.

4.4 Including Embedded Options

Call provision grants the issuer the right to retire the debt, fully or partially, before the scheduled maturity date. In general, investors require a larger yield spread to a comparable Treasury security for an issue with an embedded option that is favorable to the issuer (e.g., a call option) than for an issue without such an option. In contrast, market participants require a smaller yield spread to a comparable Treasury security for an issue with an embedded option that is favorable to the investor (e.g., put option or conversion option). In fact, for a bond with an option favorable to an investor, the interest rate may be less than that on a comparable Treasury security.

Even for callable bonds, the yield spread depends on the type of call feature. For a callable bond with a deferred call, the longer the deferred call period, the greater the call protection provided to the investor. Thus, all other factors equal, the longer the deferred call period, the lower the yield spread attributable to the call feature. A major part of the bond market is the mortgage-backed securities sector. These securities expose an investor to prepayment risk, and the yield spread between a mortgage-backed security and a comparable Treasury security reflects this prepayment risk. The yield spread between a Ginnie Mae passthrough security and a comparable Treasury security is not due to credit risk. Rather, it is primarily due to prepayment risk.

In general, when a yield spread is cited for an issue that is callable, part of the spread reflects the risk associated with the embedded option. Reported yield spreads do not adjust for embedded options. The raw yield spreads are sometimes referred to as nominal spreads – nominal in the sense that the value of embedded options has not been removed in computing an adjusted yield spread. The yield spread that adjusts for the embedded option is OAS (Option Adjusted Spreads).

4.5 Liquidity

Within the Treasury market, a yield spread exists between off-the-run Treasury issues and non-Treasury issues of similar maturity due to differences in liquidity and the effects of the repo market. In the spread sectors, generic on-the-run yield curves can be estimated, and the liquidity spread due to an off-the-run issue can be computed. A Lehrman Brokers’ study found that one factor that affects liquidity (and therefore the yield spread) is the size of an issue – the larger the issue, the greater the liquidity relative to a smaller issue, and the greater the liquidity, the lower the yield spread.

4.6 Taxability of Interest Income

In the U.S., unless exempted under the federal income tax code, interest income is taxable at the federal income tax level. In addition to federal income taxes, state and local taxes may apply to interest income. The federal tax code specifically exempts interest income from qualified municipal bond issues from taxation. Because of the tax-exempt feature of these municipal bonds, the yield on municipal bonds is less than that on treasury with the same maturity.

The difference in yield between tax-exempt securities and Treasury securities is typically measured not in terms of the absolute yield spread but as a yield ratio. More specifically, it is measured as the quotient of the yield on a tax exempt security relative to the yield on a comparable Treasury security. The yield ratio has changed over time due to changes in tax rates, as well as other factors. The higher the tax rate, the more attractive the tax-exempt feature and the lower the yield ratio. The U.S. municipal bond market is divided into two bond sectors: general obligation bonds and revenue bonds.

For the tax-exempt bond market, the benchmark for calculating yield spreads is not Treasury securities, but rather a generic AAA general obligation yield curve constructed by dealer firms active in the municipal bond market and by data/analytics vendors.

After-Tax Yield and Taxable-Equivalent Yield The yield on a taxable bond issue after federal income taxes are paid is called the after-tax yield and is computed as follows: After-tax yield = pre-tax yield X (1 – marginal tax rate) Example: Suppose a taxable bond issue offers a yield of 5% and is acquired by an investor facing a marginal tax rate of 31%. After-tax yield = 0.05(1 – 0.31) = 0.0345 = 3.45%

Alternatively, we can determine the yield that must be offered on a taxable bond issue to give the same after-tax yield as in tax-exempt issue. This yield is called the taxable-equivalent yield or tax-equivalent yield.

Consider an investor facing a 31% marginal tax rate who purchases a tax-exempt issue with a yield of 4%.

Note the higher the marginal tax rate, the higher the taxable equivalent yield. If the marginal tax rate is 40%,

4.7 Technical Factors

At times, deviations from typical yield spreads are caused by temporary imbalances between supply and demand.

Example, in the 2nd Quarter of 1999, issuers became concerned that the Fed would pursue a policy to increase interest rates. In response, a record issuance of corporate securities resulted in an increase in the yield spread between corporates and Treasuries. In the municipal market, yield spreads are affected by the temporary oversupply of issues within a market sector.

For example, a substantial new issue volume of high-grade state general obligation bonds may tend to decrease the yield spread between high-grade and low grade revenue bonds.

In a weak market environment, it is easier for high-grade municipal bonds to come to market than for weaker credits. So a times higher grades flood weak market even when there is a relative scarcity of medium- and low-grade municipal bond issues. Since technical factors cause temporary misalignments of yield spread relationship, some investors look at the forward calendar of planned offerings to project the impact on future yield spreads. Some corporate analysts identify the risk of yield spread changes due to the supply of new issues when evaluating issues orsectors.

5. Non-U.S. Interest Rates The German bond market is the largest market for publicly issued bonds in Europe.

The yields on German government bonds are viewed as benchmark interest rates in Europe.

Nominal spreads are typically computed relative to German government bonds. Institutional investors who borrow funds on a short-term basis to invest (referred to as “funded investor”) obviously desire to earn an amount in excess of their borrowing cost. The most popular borrowing cost reference rate is the London Interbank Offered Rate (LIBOR). LIBOR is the interest rate at which banks pay to borrow funds from other banks in the London interbank market.

The borrowing occurs via a cash deposit of one bank (the lender) into a certificate of deposit (CD) in another bank (the borrower). The maturity of the CD can be from overnight to 5 years. The CD can be denominated in U.S. dollar, British pound, the Euro, the Canadian dollar, the Australian dollar, the Japanese yen and Swiss francs. When it is denominated in U.S. dollars, it is referred to as a Eurodollar CD.

6. Swap Spreads

Interest rate swap and the swap spread In an interest rate swap, two parties (called counterparties) agree to exchange periodic interest payments. The dollar amount of the interest payments exchange is based on a predetermined dollar principal, which is called the notional principal or notional amount. The dollar amount each counterparty pays to the other is the agreed-upon periodic interest rate times the notional principal. The only exchange between the parties are the interest payments, not the notional principal.

In the most common type of swap, one party agrees to pay the other party fixed interest payments at designated dates for the life of the swap. This party is referred to as the fixed-rate payer. The fixed rate that the fixed rate payer pays is called the swap rate. The other party, who agrees to make interest rate payments that float with some reference rate, is referred to as the fixed-rate receiver. The reference rates used for the floating rate in an interest rate swap is one of various money market instruments: LIBOR (the most common reference rate used in swap), Treasury bill rate, commercial paper rate, bankers’ acceptance rate, federal funds rate and prime rate.

The convention that has evolved for quoting a swap rate is that a dealer sets the floating rate equal to the reference rate and then quotes the fixed rate that will apply. The fixed rate has a specified “spread” above the yield for a Treasury with the same term to maturity as the swap. This specified spread is called the swap spread. The swap rate is the sum of the yield for a Treasury with the same maturity as the swap plus the swap spread. Example: Term of swap: 5 years Swap spread: 50 basis points Reference rate: 3-month LIBOR Notional principal: $50 million Frequency of payments: every three months

Suppose that the 5-year Treasury rate is 5.5% at the time the swap is entered into. Swap rate = 5.5% + 50 bp = 6% This means that the fixed-rate payer agrees to pay 6% annual rate for the next 5 years with payments made quarterly and receive from the fixed-rate receiver 3-month LIBOR with the payments made quarterly. Fixed-rate payments: $50,000,000(0.06)(1/4) = $750,000

If 3-month Annual Dollar Quarterly Payment LIBOR is Amount 4% $2,000,000 $500,000 5% $2,500,000 $625,000 6% $3,000,000 $750,000 7% $3,500,000 $875,000 8% $4,000,000 $1,000,000 In practice, the payments are netted out.

Role of Interest Rate Swaps Interest rate swaps tie together the fixed rate and floating rate sectors of the bond market. As a result, investors can convert a fixed-rate asset into a floating-rate asset with an interest rate swap. Suppose a financial institution has invested in 5-year bonds with a $50 million par value and a coupon rate of 9% and that this bond is selling at par value. Moreover, this institution borrows $50 million on a quarterly basis (to fund the purchase of the bonds) and its cost of fund is 3-month LIBOR plus 50 basis points.

The “income spread” between its assets (i.e., 5-year bonds) and its liabilities (its funding cost) for any 3-month period depends on 3-month LIBOR.

As 3-month LIBOR increase, the income spread decrease. If 3-month LIBOR exceeds 8.5%, the income spread is negative. This financial institution has a mismatch between its assets and its liabilities. An interest rate swap can be used to hedge this mismatch, For example, suppose the manager of this financial institution enters into a 5-year swap with a %50 million notional amount in which it agrees to pay a fixed rate in exchange for 3-month LIBOR. Suppose the swap rate is 6%. Then the annual income spread taking into account the swap payments is as follows for different values of 3-month LIBOR

Net: 9 – 6 + L – L – 0.5 = 2.5%

Effectively, the financial institution is using the interest rate swap to convert a fixed-rate asset into a floating-rate asset.

9 – 6 + L = L + 3% Convert fixed-rate asset (9%) into floating-rate asset (LIBOR + 3%)

Alternately, the financial institution could have converted its liabilities to a fixed-rate by entering into a 5-year %50 million notional amount swap by being the fixed rate payer and the results would have been the same.

- 6 + L – L – 0.5 = - 6.5% Convert floating-rate liability (L + 0.5) into fixed-rate liability ( 6.5%).

Determinants of the Swap Spread Market participants throughout the world view the swap spread as the appropriate spread measure for valuation and relative value analysis.

Swap rate = Treasury rate + swap spread

where Treasury rate is equal to the yield on a Treasury with the same maturity as the swap. Since the parties are swapping the future reference rate for the swap rate, then: Reference rate = Treasury rate + swap spread Swap rate = Reference rate – Treasury rate

The most common reference rate is LIBOR. Swap rate = LIBOR – Treasury rate The swap spread is a spread of the global cost of short-term borrowing over the Treasury rate. Studies have found a high correlation between swap spreads and credit spreads in various sectors of the fixed income market.

Swap Spread Curve

A swap spread curve shows the relationship between the swap rate and swap maturity.