Swap Benchmark Shows Wider Google Bond Spread
In US credit markets, two bonds from the same issuer can show markedly different spreads depending on whether the benchmark is a Treasury bond or an interest-rate swap. The spread, measured over the risk-free rate, signals the extra yield investors demand for credit risk.
Why Benchmark Choice Matters
Investors who isolate credit risk and hedge interest-rate exposure must pick a benchmark that reflects true market pricing. The benchmark directly influences the amount of spread that appears available in the credit segment, shaping portfolio decisions.
One prominent example is Alphabet, the AA-rated parent of Google. At the 20-year point the bond trades about 90 basis points above US Treasuries. On that basis the spread seems thin for a high-quality issuer.
When the same bond is measured against interest-rate swaps, the spread widens to roughly 150 basis points. The bond’s yield remains unchanged, yet the swap-based spread makes the AA name look more like a BBB-rated issue.
This phenomenon is not isolated to a single issue; it appears across the US market and has altered how dollar-duration hedges are constructed in credit-only strategies.
Swap Hedge Replaces Treasury Futures
In August, a fund manager replaced part of the US futures duration hedge for the long side of the dollar curve with interest-rate swaps. The selected hedge determines whether the retained spread is over Treasuries or over swaps.
Both Treasury futures and swaps are legitimate hedging tools, yet neither perfectly represents a risk-free rate. In the current environment, the premium added to Treasury yields is unusually large, while the swap curve trades below comparable government bonds, creating a negative swap spread.
Concerns about federal budget deficits and the continuous issuance of Treasuries have pushed long-dated Treasury yields higher, widening the gap between the two benchmarks.
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Analysts view the swap curve as the more accurate proxy for the dollar risk-free rate today. The apparent tight credit spread often reflects an raised Treasury yield rather than genuinely low credit risk.
By using swaps, the manager captures a higher spread without adding credit exposure. In August, at the 20-year point the dollar-denominated Google bond yielded about 100 basis points over Treasuries, while the comparable euro bond offered roughly 110 basis points over European government bonds.
Because the euro market lacks the same Treasury-swap dislocation, hedging the dollar bond with swaps lifted its spread to near 170 basis points over swaps. The manager therefore sold euro bonds, purchased dollar bonds, and secured the larger spread.
Similar adjustments were made with other issuers, moving out of Aegon and Rothesay and into Allianz and Munich Re. These trades modestly enhanced portfolio quality while preserving income levels.
Trade Execution and Portfolio Impact
These actions are not dramatic, but they allow incremental improvements in credit quality without sacrificing much yield. Measuring credit against swaps adds an extra 40 to 70 basis points of compensation.
The trade-off is exposure to the swap spread itself. If US Treasuries decline sharply, the bond’s spread over Treasuries stays the same, its total yield rises, and its price falls. The swap hedge is intended to offset that move, but a lag in swap rates would leave the position with a widened spread and a mark-to-market loss.
Historical context shows that US swap spreads are now at unprecedented negative levels. Before the 2008 crisis, 10-year swaps were about 60 basis points positive. Today the 10-year sits near –40 basis points and the 30-year near –70, even after accounting for the 25-basis-point shift from LIBOR to SOFR.
Swap Spread Risks
Overall, the approach reflects a valuation judgment: the swap rate is presently the preferred tool for hedging rate risk, and the additional 40-70 basis points represent a clear, measurable reward for assuming the swap-spread exposure.
