A spread that captures the difference between two constant maturity swap (CMS) rates (or indexes) on two different maturities. For example, a CMS spread note might pay quarterly coupons based on the difference between quarterly fixings of the 10-year (10CMS) and 5-year (2CMS) semi-annual swap rates. Also, the coupon of a given product might depend on the difference between the 10-year CMS rate (10CMS) and the 2-year CMS rate (2CMS). In shortcut form, these spreads can be expressed as follows:

CMS spread = 10CMS – 5CMS

CMS spread = 10CMS – 2CMS

CMS spread = 5CMS – 2CMS

The size of a CMS spread depends on the slope of the yield curve, and it, per se, determines the size of the coupons of CMS products. A given product would therefore be traded by investors who wish to take a view on future relative changes in different parts of the yield curve. The steeper the yield curve, the greater the spread and also the coupon, and vice versa.