Why does the interest rate swap curve have higher yields than the Treasury curve?

Answer 1

There are several reasons why the swap curve has different rates from the treasury curve

1. The US treasury curve is based on yields of US Government bonds -- which are considered risk free. The Swap Curve is based on LIBOR -- which is the rate that high quality London Banks will lend to other high quality London Banks. While these are low risk, they are not riskless.

2. Taxes. US Treasury Bonds are taxed differently than Swaps. Markets will adjust the yields to reflect the difference in taxes due.

3. Compounding. Swaps and US Treasuries do not use the same compounding methods when discounting cash flows. This one is probably the least likely to affect the differences in rates.

4. Interest Rate Risk. A three year treasury and a three year swap do not have the same interest rate risk -- so they shouldn't have the same rates.

Answer 2

This is definitely not my specialty, but if I'm not mistaken, the yields are still "inverted" and has made the market askew. But, I would still think Treasuries are more "stable" (lower yields) and the swaps are more of a derivative play (higher yields), which you would expect to pay for the risk.

Answer 3

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