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.