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Constant Maturity Swap (CMS) Definition

What Is a Immovable Maturity Swap (CMS)?

A constant maturity swap (CMS) is a variation of the regular interest rate swap in which the floating lump of the swap is reset periodically against the rate of a fixed maturity instrument, such as a Treasury note, with a longer ripeness than the length of the reset period. In a regular or vanilla swap, the floating portion is usually set against LIBOR, which is a short-term standing.

Put another way, the floating portion leg of a regular interest rate swap typically resets against a published index. The hover leg of a constant maturity swap fixes against a point on the swap curve on a periodic basis. In this way, the duration of profited cash flows is held constant.

Key Takeaways

  • Constant maturity swaps are interest rate swaps that glossy volatility associated with interest rate swaps by pegging the floating leg of a swap to a point on the swap curve on a cyclical basis.
  •  Under a CMS, the rate on one leg of the constant maturity swap is either fixed or reset periodically at or relative to LIBOR or another waft reference index rate.
  • The floating leg of a constant maturity swap fixes against a point on the swap curve on a intermittent basis so that the duration of the received cash flows is held constant.

Basics of Constant Maturity Swap

Sempiternal maturity swaps are exposed to changes in long-term interest rate movements, which can be used for hedging or as a bet on the direction of valuations. Although published swap rates are often used as constant maturity rates, the most popular constant operability rates are yields on two-year to five-year sovereign debt. In the United States, swaps based on sovereign rates are time again called constant maturity Treasury (CMT) swaps.

In general, a flattening or an inversion of the yield curve after the swap is in station will improve the constant maturity rate payer’s position relative to a floating rate payer. In this plot summary, long-term rates decline relative to short-term rates. While the relative positions of a constant maturity rate recompense and a fixed rate payer are more complex, generally the fixed rate payer in any swap will benefit especially from an upward shift of the yield curve.

CMS in Practice

For example, an investor believes that the general yield curve is with respect to to steepen while the six-month LIBOR rate will fall relative to the three-year swap rate. To take service better of this change in the curve, the investor buys a constant maturity swap paying the six-month LIBOR rate and come by the three-year swap rate.

The spread between two CMS rates (e.g., the 20-year CMS rate minus the 2-year CMS rate) contains poop on the slope of the yield curve. For that reason, certain CMS spread instruments are sometimes called steepeners.

Due to recent defamations and questions around its validity as a benchmark rate, LIBOR is being phased out. According to the Federal Reserve and regulators in the U.K., LIBOR wish be phased out by June 30, 2023, and will be replaced by the

Who Uses Constant Maturity Swaps and Why?

The constant maturity swap is engaged by two types of users:

  1. Investors or institutions attempting to hedge or exploit the yield curve while seeking the flexibility that the swap intention provide.
  2. Investors or institutions seeking to maintain a constant liability duration or constant asset.

The main advantages and damages of a constant maturity swap are:


  • It maintains a constant duration

  • The user can determine “constant maturity” as any point on the supply curve

  • It can be booked the same way as an interest rate swap

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