It's all about getting the right amount of money to the right person at the right time. Most importantly for bond traders and underwriters, there is a fairly smooth transition between the two. Ifty Islam, head of fixed-income strategy with Deutsche Bank in New York, agrees. It's also a good vehicle for hedging. For one thing, the swap curve is much more market-sensitive than the Treasury curve.
Spreads tend to rocket in line with movements in the equity markets.
Treasuries are considered to be effectively free of credit risk, by virtue of their government guarantee, while swaps generally have a double A rating, indicative of the aggregate creditworthiness of the principal swap market intermediaries - in other words, banks. As a result, when equity markets are under pressure, investors tend to sell equity and buy short-dated bonds, and swap yields tend to rise relative to treasury yields. Treasuries traditionally had a broad and diverse investor base, which meant that prices were unlikely to be affected by technicalities. With swaps, volatility is likely to remain much more of a problem. A shortage of either payers or receivers could push prices out of line.