on 24-Nov-2014 (Mon)

Swap spreads generall y refer to spreads that must be applied to swaps to make them in some way ‘equivalent’ to a bond.

In Europe, governments are normally quoted as negative numbers, consistent with the spreads arising from Par/Par transactions, although government spreads are frequently referred to as positive for convenience.

if we par/par s wap a bond at a spread of -40 bp ( we receive floating less 40 bp) and this spread moves to -35 bp, we can unwind the position by paying on a swap of the same notional and pay floating less 35 bp to lock in a loss of 5 bp running. the upfront payment in the second swap makes us able to sell the original bond (from first transaction) at 100, exactly the price we paid for it in the first place. We got rid of the bond and we are left with 2 swaps in opposite direction, netting at -5bp fixed on every payment.

http://norvig.com/spell-correct.html <-- read about spellchecking