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CME Group

Replicating swap spreads with futures

By James Boudreault, CFA, CME Group – Swap Spreads replicated with Treasury Futures and Deliverable Swap Futures generate multiple benefits, including potentially higher return on capital.

Swap Spreads – A “Spot Swap Spread” combines a long or short position in an interest rate swap (or “IRS”) with an opposing short or long position in a Treasury security of the same tenor, (eg, a 10-year fixed-rate payer IRS versus a long position in a 10-year Treasury note).
Swap Spreads are a significant portion of daily transactions in the US Dollar IRS market, owing to their versatility.  They allow market participants to express views on credit spreads (the difference between IRS rates and Treasury yields) and supply/demand changes in the Treasury market, and they provide an alternative means of taking a view on the slope of a yield curve.
To learn more about replicating Swap Spreads with Futures, read the full paper here.

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