A swap rate is the fixed rate that the fixed rate payer, in a swap agreement, makes to the floating-rate payer. In other words, it is what firms, investors and traders pay to exchange fixed interest payments for floating interest payments. This rate is what makes the present value of the fixed-rate payments equal to the present value of the floating-rate payments. Swap rates are often used as benchmarks for debt purchased with borrowed funds, including mortgage-backed and auto-loan securities. Narrower swap spreads can push borrowing costs lower even if Treasury yields remain unchanged.

A negative swap spread results from the swap rate falling below Treasury yields. On the face of it, it signals that the market is pricing more risk in the credit of the U.S. government than that of banks and financial institutions. Of course, this is not a faithful interpretation of the situation. In fact, a negative swap spread only suggests the existence of great financial imbalance within the financial positions (balance sheets) of banks, compelling them to excessively depend on corporate bond issuance. Additionally, negative spreads may result from companies’ attempts to tap into the debt market to lock in low borrowing costs. They frequently embark on swapping the issuance from fixed to floating payments, which leads to tightening of swap spreads.