Why do market participants in some countries prefer to use the swap curve rather than the government bond yield curve?

Question

What will be an ideal response?

Answer 1

In many countries, market participants use the country's swap curve as the benchmark interest rates rather than the country's government bond yield curve. In recent years the liquidity of the interest rate swap has increased to the point where it is now a more liquid market than the market for some government bonds. One would expect that if a country has a government bond market, the yields in that market would be the best benchmark. That is not necessarily the case. Below we give three advantages of using a swap curve over a country's government securities yield curve.

First, there may be technical reasons why within a government bond market some ofthe interest rates may not be representative of the true interest rate but instead be biased bysome technical or regulatory factor unique to that market. Second, to create a representative government bond yield curve, a large number ofmaturities must be available. Finally, the ability to compare government yields across countries is difficult becausethere are differences in the credit risk for every country.