The swap spread is the gap between the SOFR swap rate and the comparable-tenor Treasury yield . It captures the additional funding cost banks pay above the Treasury curve. Banks often quote loans as the SOFR swap plus a credit spread , so the swap spread is embedded in the all-in coupon .
Why does it move?
Swap spreads widen when bank funding stress rises (regional banking strain, money market disruption) and tighten when bank balance sheets and treasury markets are calm. They also reflect supply-demand imbalances in the swap market, especially around quarter-end and year-end when dealer balance-sheet capacity is constrained.
How should borrowers think about it?
On a fixed-rate bank loan quoted as swap-plus-spread, the swap spread is part of your all-in cost. If the bank quotes Treasury-plus-spread instead, the swap spread is implicitly absorbed by the bank. Compare like-for-like by always converting both quotes to all-in coupon before deciding.
Sources
- Daily Treasury Par Yield Curve Rates · U.S. Department of the Treasury · daily
- Secured Overnight Financing Rate (SOFR) · Federal Reserve Bank of New York · daily