Spreading Treasury Futures and Deliverable Swap Futures

While credit risk exposure has traditionally been captured by spreading over-the-counter (OTC) interest rate swaps (IRS) against on-the-run (OTR) U.S. Treasury notes or bonds, the expansion of Exchange listed US Dollar Interest Rate Swap futures (deliverable swap futures, or DSFs) at the major tenor points of the Treasury yield curve (2-,5-,7-,10-,20-,30-Years) has created new opportunities for market participants to futurize credit risk spreads. Among potentially many applications, when they are used in conjunction with Treasury Note futures or Treasury bond futures, DSFs provide an alternative, capitalefficient means to acquire or to hedge swap spread exposures. Following a brief overview of DSFs, Treasury futures, and Swap Spreads, this note illustrates how.

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