What is the swap rate?

The swap rate is the fixed interest rate that one party agrees to pay in a plain vanilla interest rate swap, in exchange for receiving floating-rate payments (typically SOFR). Swap rates exist for various maturities, from 1 year to 30 years, and together they form the swap curve. This curve is a critical benchmark for pricing corporate bonds, structured products, and other fixed-income instruments.

Swap rates differ from Treasury yields because they embed the credit risk of the banking system. In a swap, the counterparties are typically banks or financial institutions, so the fixed rate includes a small premium for the risk that a counterparty might default. This difference is called the swap spread. Historically, swap rates exceeded Treasury yields by a modest margin, but in recent years, long-dated swap spreads have turned negative, meaning swap rates are below Treasury yields. This anomaly reflects heavy demand from pension funds and insurers to receive fixed rates in swaps, along with increased Treasury supply from large government deficits.

For corporate treasurers, swap rates are often more relevant than Treasury yields because corporate bond pricing is benchmarked to swaps rather than Treasuries. When a company issues a 10-year bond, its coupon is typically described as "swaps plus X basis points," where X reflects the company's credit spread. This makes the swap curve the de facto risk-free benchmark for private-sector borrowing.

Traders and economists watch swap rates for signals about monetary policy expectations and credit conditions. A steep swap curve suggests markets expect rates to rise or remain elevated, while a flat or inverted swap curve signals expectations for rate cuts. Because swaps are traded in enormous volume with tight bid-ask spreads, they provide a liquid, real-time read on where the market prices fixed-income risk across the entire maturity spectrum.