Swap Spreads as Relative Value Indicators for Government Bonds
Swaps spreads are commonly used to assess relative values between bonds. For example, many investors comparing par asset swap spreads between two bonds will conclude the bond with the wider spread is the richer of the two issues. Initially, such a conclusion seems intuitively reasonable. Since the bond with the wider par asset swap spread will pay the investor less for the same initial investment, it should be viewed as the richer bond. However, we’ll see in this chapter that such comparisons are fraught with complications, and investors are urged to use caution when attempting to use the swap curve to assess relative values between bonds. In fact, we argue ...