So here is my question: Lets say the 30 yr swap is at 5.70, so that means the fixed rate is 5.70 and I can lock in 3 month LIBOR for 30 years at 5.70, now if i wanted to enter into a swap today LIBOR is at 5.25, I would expect the fixed rate to be around the current LIBOR rate. My question is : is the 30 yr LIBOR rate what you would make at the end of the 30 years? like a fwd rate? So if I guess my question is taking the info from the 30 year swap and applying it to entering in a swap, any help greatly apprecaited Thanks,
If 3-month LIBOR is at 5.25 and the 30 yr swap rate is at 5.7, that just means that we have a normal yield curve and that forward rates are somewhat higher than current rates. It means that at the first swap payment, the fixed rate payer is forking over some money to the floating rate payer. Of course, after that anything can happen…
Joey- Thanks for the reply, I really appreciate, last question on this Would you agree with the following “The swap rate is the rate that equates Fixed to Float” If so, in my example, is the 5.70 on the 30 year, is that saying that if fwds are realized the 3 month LIBOR will be 5.70 in 30 years? Thanks again,
No, for a couple of reasons. 1. It relies on rational expectations hypothesis, which is widely disbelieved. (Same reason we don’t expect short-term rates to be the currently observed implied forward rates.) 2. even if REHTS were true, you’d need some balancing on the high side (i.e. if short-term rates are lower than fixed now, to even out the swap they would have to be higher for some period in the future).