i dont understand swap spreads, someone plz help what is swap spread?? is it the fixed rate - the floating rate?? how do managers use swap spreads to compare the relative attractiveness b/t floating and fixed rate securities?? how do swap rate reset???how does the process work?? thx

Fix rate (in swap contract) compare to the risk-free instruments in the same maturity. For example…2 yr swap fix rate is 5%, and 2 yr treasury rate is 4%, your swap spread is 1%.

ws Wrote: ------------------------------------------------------- > Fix rate (in swap contract) compare to the > risk-free instruments in the same maturity. > > For example…2 yr swap fix rate is 5%, and 2 yr > treasury rate is 4%, your swap spread is 1%. How is swap spread used “as an indication of credit spreads”? (p.56, Schweser 3)

Its an indication of ~AA corp is borrowing at, thus risk defined as the spread over the treasuries

guys I know how to calculate swap spreads but I am asking how it is used as an indicator. quorky, you seem to be touching a bit of THAT answer I am after. Could you be more specific?

I don’t think swap spreads are really covered (it’s in the optional part of R. 35) but they indicate general credit conditions because they show relative spread between super credit worthy (Uncle Sam) and others with pretty good credit (counterparties in a swap).

TooOld4This Wrote: ------------------------------------------------------- > I don’t think swap spreads are really covered > (it’s in the optional part of R. 35) note that it’s NOT optional elsewhere (p.385-386, Vol 3) > but they > indicate general credit conditions because they > show relative spread between super credit worthy > (Uncle Sam) and others with pretty good credit > (counterparties in a swap). I don’t understand this. Are we trying to use swap spread as a “better” proxy of credit spread of “good credit” corporate bonds? Let’s say 5 year swap spread = 1%. How do you relate this to the condition of the credit market? (btw, no need to explain on the difference between treasury and swap rate)

If you’re receiving fixed in a 5yr plain vanilla swap your leg is like owning a 5 yr fixed coupon bond issued by the counterparty. Credit issues are similar, except swap spreads I would guess are always lower than regular credit spreads because of netting. I’m not sure if the swap spread is a better proxy, it’s just another measure of credit spreads. Maybe swaps are available at certain maturities where there are no bond issues of decent credit quality. Then you use the swap spread to indicate credit conditions because that’s all you have. And as ws noted, they don’t apply below highest grades, because nobody swaps with a party with bad credit. Thx for pointing out 385/386, I forgot about that.

Sticky, as I said before: “Its an indication of ~AA corp is borrowing at, thus risk defined as the spread over the treasuries” It is similar to credit spreads lets take agencies for example: When you buy agencies in the bond world they are denoted as T + Spread… So lets say you want to buy a 5 year bullet benchmark agency, you would be quoted something like 55/5y

good explanation. Thanks quorky

just trying to help in any way that I can ;o) now to get to the hard stuff - Macro / Micro attribution

quorky, macro/micro is just as logic as swap stuff, just write out all the formulas and realize that they all have to minimize to rp*wp-rb*wb.

lol, swap stuff seems like a walk in the park compared to this stuff… I somewhat understand the Currency + Market + Security, fine… Although, when reviewing 2007, the no weight for bench threw me off and I got a 0… What I do not understand is the Macro… There seems to be like a pyramid type structure of allocating cash… Am I calcing incremental return, am I spitting at the ceiling? Just dont know. I dont think I saw a good example in schweser or cfa to actually try to understand it… I am reading the GIPS thread for review and then going to try to get my head around this stuff… It just seems so close together that it starts to blend…

CSK, I am getting confused: I am looking at the schweser quicksheet and see the following: Global Perf Attrib Analysis -Currency Formula -Market Allo Formula -Security Formula Micro Perf Attrib -Pure Sector Allo Formula -Allo/Selection Formula -Within Sector Formula Macro Perf Attrib There are no formulas? or Macro / micro is essentially the same thing?

no, they are different, look at CFAI books or schweser. Also search forums there has been extensive discussions on micro, i believe ‘ws’ started the thread. It has very detailed analysis of micro

thanks, will do…