Definition
The swap spread measures the gap between an interest rate swap (IRS) rate and a Canadian government bond yield of the same duration (e.g., 5 years).
**Relevance to mortgage rates**: Canadian banks use interest rate swaps to hedge against rate risk when issuing fixed mortgages. The offered mortgage rate incorporates: 1. 5-year government bond yield (base) 2. + Swap spread (hedging cost) 3. + Bank's net margin (profit)
**Market signal**: - High swap spread → high bank hedging costs → upward pressure on fixed rates even if government bonds remain stable - Negative spread (rare phenomenon) → signal of systemic stress in capital markets
**Practice**: Experienced mortgage brokers monitor 5-year swaps in real time (Bloomberg/Reuters) to anticipate fixed rate moves before banks update their official posted rates.