United StatesUS government bonds, or Treasuries, have long been considered by investors as the closest proxy for a ‘risk-free’ rate of return. Bonds issued by companies – which have historically been seen as less likely to default on their debts – have therefore been priced in reference to Treasury yields.
This logic is being undermined by the US government’s declining fiscal health. An alternative reference point for pricing corporate bonds exists in the form of interest rate swaps which, unlike Treasuries, reflect real-word funding, liquidity and hedging costs, and are widely used elsewhere.
Benchmarking credit spreads using swaps not only overcomes Treasury-related market distortions but challenges investors to look at credit valuations in a different light.
The case for using interest rate swaps
Interest rate swaps are derivatives contracts that exchange future streams of interest payments. They are widely used to hedge against, or speculate on, changes in interest rates and to convert floating to fixed income streams, and vice versa. The market for interest rate swaps is global, highly liquid and vast: outstanding notional volumes run into hundreds of trillions of US dollars.1
We see five reasons why interest rate swaps should now be the primary reference point for US credit spreads – not US Treasury yields.
- Swaps reflect real-world funding
Swap rates reflect real-world funding conditions since they are directly shaped by the cost of inter-bank borrowing and liquidity within institutional money markets. The floating leg of swap rates is linked to the Secured Overnight Financing Rate (SOFR), the successor to LIBOR, which is the rate at which major banks can actually borrow cash.2 - Swaps reflect liquidity and hedging costs
Financial institutions hedge interest rate risk with swaps, not US Treasuries, because they can precisely match the risk profile and liquidity needs of their liabilities. Swaps are therefore a better measure of what it costs to hedge interest rate risk over time, across maturities and in changing conditions. - Swaps serve as benchmarks elsewhere
Outside of the US, interest rate swaps have long served as the primary benchmark for both pricing and hedging non-sovereign debt. It is estimated that between 60% and 80% of non-sovereign bonds across developed markets are priced in reference to swaps.3 Convergence towards using swaps as the base spread would be a positive development, as it levels the global playing field for issuers and investors alike. - Swaps avoid Treasury-specific distortions
Treasury markets are impacted by a range of factors that do not reflect the real-world costs of company borrowing. They are distorted by central bank actions (like bond purchases) and regulatory rules (like liquidity coverage and capital adequacy requirements) that boost demand, lowering US Treasury yields. - Swaps mitigate US policy risk
Treasury yields are also heavily shaped by US fiscal policy, of course. The mounting federal debt, fed by a structural budget deficit and rising interest payments (see chart below), increasingly brings into question the long-term fiscal health of the US government – and, by extension, the logic of using Treasuries as a notionally risk-free rate of borrowing. This risk is amplified by perceived attacks on central bank independence. An independent Federal Reserve is essential for disciplined, consistent and credible monetary policy that resists short-term political interests. If this is questioned and foreign buyers avoid US Treasuries, the impact on Treasury yields could be material.
Source: Congressional Budget Office, 2025
Subhead: US federal deficit and net interest payments (% GDP)
Overview: This bar chart shows the US federal government’s primary budget deficit and net interest payments, as a percentage of US gross domestic product (GDP), since 1965. Forecast data is included for the period 2025 to 2055.
Overall, this chart illustrates how net interest payments are expected to overtake the primary US budget deficit and become larger, as a percentage of US GDP, than at any point during this period.
Moving beyond government debt as the ‘risk-free’ rate
As the US fiscal picture deteriorates, and Treasury markets continue to be buffeted by idiosyncratic factors, logic dictates that valuations of US credit should be detached from that of US government debt.
After all, it may soon not be unusual for US corporate bonds to trade at a valuation premium to Treasuries. While a rare event for US credit, a 10-year bond from Microsoft were offered at a yield 48 basis points lower than that of 10-year Treasuries this September.4
Similar trends are emerging in other developed markets: following recent downgrades to France’s credit rating, bonds from blue-chip French issuers including Airbus, Axa and L’Oreal have traded at lower yields than French government debt of comparable maturity.5
For investors focused solely on valuations relative to government debt, credit is likely to appear very expensive. When compared to Treasuries, investment grade US corporate bonds trade at near-record tight spreads.6
Changing reference points challenges this dogma. When compared to swaps, investment grade US credit looks much less expensive: by this benchmark, relative valuations have historically been higher two-fifths of the time (see chart below).7
Interest rate swaps are a logical alternative to government debt for benchmarking credit spreads. At a minimum, when US Treasuries are increasingly questioned as a risk-free rate, we believe that using swaps as an additional measure of valuation is prudent.
Source: Source: ICE / Bloomberg / Impax, September 2025
ICE BofA US Corporate Index Option-Adjusted Spread vs * the Secured Overnight Financing Rate (SOFR) and ** US Treasuries
Subhead: US investment grade credit spreads vs Treasuries and interest rate swaps (basis points)
Overview: This line chart compares the difference between US investment grade corporate bond (credit) yields and two benchmarks over the past decade. The two benchmarks are as follows: first, the Secured Overnight Financing Rate (SOFR) which represents interest rate swaps; and second, US Treasuries.
Overall, this chart illustrates how the difference between US investment grade credit spreads and these two reference points has grown since 2022.
1 Bank of International Settlements, 2025
2 The London Interbank Offered Rate (LIBOR) is a now-retired benchmark interest rate for short-term loans between global banks
3 Kreicher, L., McCauley, R.N., & Wooldridge, P.D., 2017: The bond benchmark continues to tip to swaps. BIS Quarterly Review / International Capital Market Association, 2018: The Asia-Pacific Cross-Border Corporate Bond Secondary Market
4 Forsyth, R.W., 19 September 2015: Move Over, Treasuries. These Are the New Safe Assets. Barron’s
5 Smith, I., Herbert, E. & Storbeck, O., 14 September 2025: French companies’ borrowing costs fall below government’s as debt fears intensify. Financial Times
6 ICE / Bloomberg / Impax, September 2025
7 ICE / Bloomberg / Impax, September 2025
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