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| Decomposing Swap Spreads by Peter Feldhütter of the Copenhagen Business School, and August 24, 2007 Abstract: We analyze a six-factor model for Treasury bonds, corporate bonds, and swap rates and decompose swap spreads into three components: A convenience yield from holding Treasuries, a credit risk element from the underlying LIBOR rate, and a factor specific to the swap market. The convenience yield is by far the largest component of spreads, there is a discernible but not highly variable contribution from credit risk, and a swap-specific factor with higher variability which in periods is related to hedging activity in the MBS market. The model further sheds light on the relationship between AA hazard rates and the spread between LIBOR rates and GC repo rates and on the level of the riskless rate compared to swap and Treasury rates. JEL Classification: G12, G13, G21. Keywords: Swap yields, term structure of interest rates, credit spreads. Previously titled: "A Model for Corporate Bonds, Swaps and Treasury Securities" --and-- "A Model of Swap Spreads and Corporate Bond Yields" Books Referenced in this Paper: (what is this?)
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