macroeconomics, investment, swap-spreadsWhy is the swap rate normally above the US Treasury rate - i.e. why is the swap spread normally positive? In 2010, the swap rate was below the US Treasury rate - does that imply an expanding or shrinking economy?
The swap rate is based on interbank lending rates. Therefore the swap spread includes credit risk of AA financial intermediaries and it virtually always trades above on-the-run treasuries of the same maturity.
Suggestions for why the swap spread (i.e. swap rate - treasury rate) went negative briefly is that many corporations issue significant fixed-rate debt and then used swaps to change their interest rate risk from fixed to floating. When entering a swap these firms are competing to receive fixed (i.e. bidding yields down). These swaps tend to narrow the spread between corporate and treasuries.
Still, it is difficult to have a satisfying answer to this. Times of severe financial distress do produce bizarre outcomes and temporary arbitrage opportunities. For example, the T-Bills traded at negative yields -- essentially investors were willing to give up some principal to hold a risk-free asset -- this violates the time value of money.
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