Swap spread

<p>Swap spreads are the difference between the yield on a government bond or sovereign debt security and the fixed component of a swap, both of which have a similar time until maturity. Given that most sovereign debt securities such as government bonds are considered to be risk free securities the role of a swap spread is to reflect the risk levels of an agreement perceived by the investors involved. Swap spreads are therefore categorised to be an economic indication tool as the size of the swap spread reflects the level of risk aversion within the financial markets. Swap spreads is a term coined by economists to generate a tool to assess current market conditions. Swap spreads have become more popular as a metric of financial forecasting and measurement as a result of their increased correlation to financial market activity and volatility. Used as an indicator of economic activity, higher swap spreads are indicative of greater risk aversion within the market place. Governments, financial markets and policy makers in general therefore utilise this metric to make decisions as it is argued to reflect market sentiment. 
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Swap spread open-in-new

Swap spread