Intermarket Spread Swap

DEFINITION of 'Intermarket Spread Swap'

A swap transaction meant to capitalize on a yield discrepancy between bond market sectors. Intermarket spread swaps are based upon expectations of yield spreads between different bond sectors or spots on the yield curve. By entering a swap, parties are able to gain exposure to the underlying bonds, without having to directly hold the securities.

BREAKING DOWN 'Intermarket Spread Swap'

Opportunities for intermarket spread swaps exist when there are credit quality or feature differences between bonds. For example, if there is a wide credit spread between high credit quality corporate and treasury bonds, and the spread is expected to narrow, investors would swap government securities for corporate securities. One party would pay the yield on corporate bonds while the other the treasury rate plus the initial spread. As the spread widens or narrows, the parties will begin to gain or lose on the swap.

RELATED TERMS
  1. Pure Yield Pickup Swap

    A transaction in which bonds with lower returns are swapped for ...
  2. Substitution Swap

    An exchange that is carried out by trading a fixed-income security ...
  3. Swap Spread

    1. The difference between the negotiated and fixed rate of a ...
  4. Intermarket Sector Spread

    The difference in yields between two fixed-income securities ...
  5. Rate Anticipation Swap

    A type of swap in which bonds are exchanged according to their ...
  6. Swap Dealer

    An individual who acts as the counterparty in a swap agreement ...
Related Articles
  1. Managing Wealth

    The Advantages Of Bond Swapping

    This technique can add diversity to your portfolio and lower your taxes. Find out how.
  2. Markets

    The Fast-Paced World of Libor & Fixed Income Arbitrage

    LIBOR is an essential part of implementing the swap spread arbitrage strategy for fixed income arbitrage. Here is a step-by-step explanation of how it works.
  3. Trading

    Get Active In Your Bond Portfolio

    Find out why being a couch potato with your bonds actually could be mashing your results.
  4. Markets

    Understanding Yield Spread

    Yield spread is the difference in yields between debt instruments.
  5. Managing Wealth

    How To Read Interest Rate Swap Quotes

    Puzzled by interest rate swap quotes terminology? Investopedia explains how to read the interest rate swap quotes
  6. Managing Wealth

    Corporate Bonds: An Introduction To Credit Risk

    Corporate bonds offer higher yields, but it's important to evaluate the extra risk involved before you buy.
  7. Trading

    Currency Swap Basics

    Find out what makes currency swaps unique and slightly more complicated than other types of swaps.
  8. Investing

    Different Types of Swaps

    Investopedia explores the most common types of swap contracts.
  9. Markets

    What's an Interest Rate Swap?

    An interest rate swap is an exchange of future interest receipts. Essentially, one stream of future interest payments is exchanged for another, based on a specified principal amount.
  10. Managing Wealth

    How Bond Market Pricing Works

    Learn the basic rules that govern how bond prices are determined.
RELATED FAQS
  1. What would motivate an entity to enter into a swap agreement?

    Learn why parties enter into swap agreements to hedge their risks, and understand how the different legs of a swap agreement ... Read Answer >>
  2. When was the first swap agreement and why were swaps created?

    Learn about the history of swap agreements, the first swap agreement between IBM and the World Bank, and how swaps have evolved ... Read Answer >>
  3. Can bond traders trade on interest rate swaps?

    Read about interest rate swaps and why these transactions are performed by institutional actors in the bond market, not individual ... Read Answer >>
  4. What are some risks a company takes when entering a currency swap?

    Read about the risks associated with performing a currency swap, including counterparty credit risk in the event that one ... Read Answer >>
  5. What are interest rate swaps on the OTC market?

    Learn about interest rate swaps and how they are traded over the counter, and understand the impact of Dodd-Frank on swaps ... Read Answer >>
  6. How are swap agreements financed?

    Learn how swap agreements are now cleared by swap execution facilities and require the use of collateral margin to hold, ... Read Answer >>
Hot Definitions
  1. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  2. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  3. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  4. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  5. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  6. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
Trading Center