The spread over a floating benchmark such as SOFR that an investor earns by buying a fixed-rate bond and swapping its coupons into floating.
Buying a corporate bond and paying fixed on an interest-rate-swap of the same maturity leaves you with a floating stream of SOFR plus a margin. That margin is the asset swap spread, and it isolates the credit and funding component from the rates component.
Banks and relative value desks think in asset swap terms because they fund in floating. The gap between a bond's asset swap spread and its credit-default-swap level is the CDS basis, a classic arbitrage measure.
Example: a 5-year bond yields 5.30%, the 5-year swap rate is 4.05%. The asset swap spread is roughly 125 basis points, so the investor receives SOFR plus 125 and carries no outright duration.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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