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What are benchmark yield curves?

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The US Treasury yield curve plots the rates that are interpolated by the US Treasury Department from the daily yield curveconstant maturity treasury (CMT) rates – calculated from composites of the YTM quotations obtained by the Federal Reserve Bank of New York on the most recently issued (“on-the-run”) Treasury securities that are actively traded in the over-the-counter market at fixed maturities, currently of 1, 3 and 6 months and 1, 2, 3, 5, 7, 10, 20, and 30 years.  It shows the required yield on the respective semiannual-coupon paying Treasury security on an actual/365 or 366 (actual/actual) day-count basis corresponding with the instrument’s remaining time to maturity.

The swap curve is a yield curve of market interest rates derived from the most liquid and dominant nongovernment instruments in their respective maturity and constructed through zero-coupon stripping (“bootstrapping”).  Boot strapping is the construction of a zero-coupon fixed-income yield curve from the observed market rates on the most liquid nongovernment instruments in their respective maturity, by plotting the LIBOR rates for the shorter maturities and, commonly, the par swap rate for the longer maturities.

Swap curves are generally used in the wholesale interbank credit market instead of a government yield curve for various reasons, including:

  • Swap rates are quoted for more bond maturities – 2, 3, 4, 5, 6, 7, 8, 9, 10, 15, and 30 years – than Treasuries;
  • The credit risk reflected in the swap rates, which are the rates on the most liquid nongovernment instruments, is closer to that of the issuers than a government bond yield rate;
  • There is little or no government regulation of the swaps market;
  • Large demand for government bonds can significantly alter the government bond yield curve, which cannot happen to the swap curve.

The spot yield curve is the yield curve constructed by plotting Treasury spot rates on zero coupon bonds, rather than yields, against the term to maturity.  The spot rate treasury curve is used to discount the single cash flow of zero-coupon bonds at maturity.

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